Q. We are so excited to find your site. You have no idea! I am an attorney and my husband is about to finish fellowship in a surgical subspecialty with an offer of employment for $400k his first year. I'm not currently working because I'm home with a new baby. We have NO savings. We have my student loans ($150k), my husband has no school loans, we have $30k in credit card debt, and $20K in loans from friends and family, and a $30k personal loan.
Anyway, our question is whether we should buy a house next year when my husband starts making “real” money. We are in debt but fear “wasting” any more money in rent. Why is it better to pay rent than to put money into building equity? If we do rent, for how long should we do it? I have read your post about physician loans for homes and the comments but I am still conflicted and this is why. Can you clarify?
You're going to tell us to rent, I know it, but can you just please tell me why? It seems like if the cost of rent/mortgage are roughly the same, shouldn't we buy?
How to Transition to Attendinghood Properly
A. She was so nice, especially for an attorney! That always makes it hard to be as frank as I often need to be replying to emails like these. This is a great demonstration of the burning desire to buy a house that graduating medical students and graduating residents have. It's a very interesting phenomenon that I find fascinating. At any rate, here is my reply to her:
One piece of bad news and one piece of very good news.
First the bad, you're not in very good shape — $20K borrowed from friends, $30K borrowed from credit cards, $30K personal loan, and $150K in student loans from someone who isn't even working. Not good. Given your debt and lack of any financial reserves, there's a reasonable possibility nobody is going to loan you any more money, even via a doctor loan.
Second, the good. The two of you have a huge hole, but very soon you will have a very big shovel. If you don't increase your lifestyle, you can rapidly pay off all this debt and then move on with the rest of your life being financially successful.
How you manage your finances in the next 18-24 months is going to dictate how the rest of your life goes. Don't blow it. You two need to get together, educate yourselves, and write down a plan. Then follow it.
What About Buying that House?
The house is almost an after-thought. It's a totally minor issue compared to the above. But let's address it since that was the question you sent me.
It is possible that if the housing market goes up sharply and/or interest rates go up sharply that you will be better off buying a house earlier using a 0-10% down doctor loan rather than waiting a few months to clean up your mess first. However, I wouldn't personally do that, so I can't recommend it to you.
Here's what I would do. I assume you're going back to work again. Personally, I think if you took out $150K for your degree that you ought to work until that's gone. Being a stay-at-home mom is awesome (my wife does it) but she wouldn't have gotten to do it if there were student loans still hanging around for her two degrees.
I also don't think that someone who owes credit card debt and personal loans has the financial discipline and resources necessary to own a house. The practice you get cleaning up that mess will get you ready behaviorally to be a homeowner. Which is fine, since you don't really want to buy until you know your husband is in a stable job. That will be at least 3-6 months after beginning his new job. So that gives you 12 months to clean up your mess. It shouldn't be hard to do that on $400K + your salary.
Is Renting “Throwing Away Money”?
Renting isn't “throwing money away” any more than paying interest, property taxes, maintenance costs, transaction costs, cleaning costs, landscaping costs, repairs, utilities, etc are throwing money away. It costs money to live somewhere. Sometimes it's better to pay those costs via rent. Sometimes it's better to pay those costs via owning, which involves all those other costs mentioned above.
For you, in the next 12 months of your life, it's better to pay them as rent. After that, if the job is working out great for your husband (and you if you're still working at that point), then it will be better to own. Only a small amount of the total expense of owning a home goes toward equity. Sure, the property might also appreciate, but it might also depreciate. Trust me when I say it works both ways.
Setting Appropriate Goals
If I were in your position, my goal would be to owe nothing more than $100K of your student loans by the end of 2015, then buy a house using a doctor loan. By the end of 2016, I'd try to be totally debt-free except that mortgage. By the end of 2017, I'd try to refinance into a conventional mortgage (using a 20% down payment), assuming lower rates are still available compared to your doctor loan. If they're not, then you're stuck with the doctor loan for the long term.
Hope that helps. I may use your post (keeping everything very anonymous of course) as a future Q&A post as it is the perfect example of how docs either get into trouble or reach financial success by managing their transition to attendinghood properly.
What do you think readers? Did I get it right? What is the secret to managing that transition to attendinghood properly? What attitude toward debt should new attendings have? Is it too early for this couple to loosen the purse strings? Comment below!