This question came by email, and I think it would be very instructive for regular WCI readers. The original email was about twice as long so I have deleted all identifying information and irrelevant information.
I graduated medical school in 2013 and took a year off, so I'm starting residency this July in a high cost of living area. I am currently renting in that high cost of living area and have been trying to decide whether or not to continue renting or to buy now in the current market before it becomes a sellers' market. My desire/goal has always been to buy a starter home (condo or townhome) before or during residency (especially if I match in this area since I plan to stay here) and keep it as a rental property after residency. To help guide my decision, I spoke to a loan officer today who specializes in doctor's loan.
I was disappointed to learn that even though they can approve up to a maximum of $417,000 with $0 down for interns, residents and fellows, they still have to abide by the 43% debt-to-income ratio limit. Given that I'll only be making about $50,000 during residency (slightly higher in 3rd & 4th year), that only permits me to be approved for a mortgage loan with monthly payment of roughly $1800, which ranges from $227,000 – $292,000 at 4.5% interest with $0 down depending on Condo and/or HOA fees. If I was living or going to be doing residency in an area where housing prices are low, I could easily get get a nice single family house for $290,000 or less. But in the high cost of living area where I live now and would like to buy, there are no decent options at that price, not even a condo!
Condos in this area are about $350k – $400k, townhouses & SFH $450k -$600k. For instance, there's a condo in my current neighborhood that I've been checking out.. it's available for both rental ($2200) and purchase ($399,900). If I could have gotten the doctor's loan to buy it, it would have been $2809 monthly payment:
- Principal and Interest: $2026/month
- Property tax: $327/month
- Insurance: $67/month
- HOA/Condo fee: $390 per month
The loan officer also said that a 5% down payment is required for condo purchase, which would reduce the monthly mortgage to $2708. I would need an income of $78,144/year or $6512/month after other debt payments are subtracted to meet the 43% required debt-to-income ratio for a monthly mortgage payment of $2809. I don't have any other debt besides student loans which aren't counted and my current IBR payment is $0.
So assuming gross income of $50,000 as a resident, I can only buy this condo home if I have an employed partner/significant other who makes at least $30,000 (after debt deductions) to be a co-buyer and will reside in the property. Family members or parents are not allowed to co-sign for the doctor loan, even if they'll be residing with you. I don't think this is fair. My parent would have been willing to do it for me. This means that single residents living and doing residency in expensive housing markets cannot buy a home at all during residency.
I would like to get your thoughts on this and any advice/tips you may have for me. I would really love to buy something now or within the first year of residency as a future investment property. Keep in mind I have a whopping $440,000 federal student loan debt, I'm going into Psychiatry, and I have a 720 credit score. I'm not from a wealthy family with parents that can loan me 20% for conventional loan and there's just no way I can save that much in a year or two. Is the information shared by the lender really accurate?
This is going to sound really blunt, but I think someone needs to tell you this in a very blunt manner. I hope you take it the right way because it truly is said in the spirit of trying to help you.
The Blunt Truth
Are you seriously considering buying a home that is 7-8 times your salary when you already owe 8-9 times your salary in student loans and have nary a penny to your name? Especially after you just “took a year off” letting that debt build and anticipate a relatively low-paying specialty as an eventual career? Why do you think a bank would loan you that kind of money? That would be a terrible gamble. If you had $400K would you loan it to someone in your position? I certainly would not do so. You are in a very precarious financial position, and one from which many physicians never recover.
The Truth About Mortgage Lenders
Remember, mortgage lenders want to lend to as many people as possible. They only get paid if they give you a loan. They have every incentive to lend you money. They generally bend over backwards to loan people just as much money as they are willing to borrow. Yet, despite that, they will not loan you money. You've got to be asking yourself, why not? Be assured there is a very logical reason, and the reason is that they are not sure they're going to be paid back. Even ignoring your monstrously large student loans, your income simply doesn't support that kind of a loan despite an adequate credit score. Your actual debt to income ratio if you include those student loans is already over 100%, and if you added on a mortgage of the size you're talking about it would be over 150%.
Here is my advice to you: Rent during residency. Start making IBR payments as soon as possible so you can get as many in during residency as possible. Only consider jobs which will qualify for PSLF, preferably in a low cost of living area. You may never be able to pay off those loans without PSLF or a similar program. [Update prior to publication: PSLF may be limited to just $57K total, which will have devastating consequences for this particular physician's finances, as well as any other doctor anticipating significant loan forgiveness.] Continue to live like a resident for at least a couple of years after residency, maxing out retirement accounts and saving up a real down payment. Then fulfill your dream of home ownership. I've owned three homes. Trust me when I say buying one before you're financially ready doesn't feel like fulfilling a dream.
I hope that isn't too blunt, but I see you are already quite a ways down a path you do not want to be on and am hoping to get you turned around before it is too late.
What say you readers? What advice do you have for this young physician starting a psychiatry residency in a high cost of living area with $440,000 in student loan debt? Remember to be kind in your comments; this is a real person and one of your colleagues. These types of situations are only becoming more and more common.