By Dr. James M. Dahle, WCI Founder
Reader Question:
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.
Disappointing Doctor Mortgage Loan Options
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 and SFH are $450K-$600L. 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 a $2,809 monthly payment:
- Principal and Interest: $2,026/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 $2,708. I would need an income of $78,144/year or $6,512/month after other debt payments are subtracted to meet the 43% required debt-to-income ratio for a monthly mortgage payment of $2,809. 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?
Why a Physician Mortgage Loan Is Not a Good Idea
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.
Don't be a broke doctor. Turn things around before it's too late.
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 backward 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%.
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 that 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. 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 homeownership. 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 way 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.
[This updated post originally published in 2014.]
I’m a PGY5 resident in a low to moderate cost of living town. When I started I looked to buy due to the plethora of under priced homes. I ended up renting instead and I can’t tell you how much better it has been for me financially and in terms of stress. I STRONGLY recommend renting to all our new guys.
Looking at your monthly payment proposal, unless you have significant secondary income you won’t have money to eat after making those payments. The last thing an overworked underpaid resident needs is to be harassed by a collection agency, and given those numbers, it’s only a matter of time before that happens. No one wants to see docs succeed more than WCI, you should really listen to his advice on this one. He is absolutely right.
Rent. I had several friends moonlight during residency and double their residency pay. If this is an option for you, use any extra income to pay down loan debt.
The reality is the percentage of foreclosures increase 4 fold when financing to borrowers with a debt to income ratio over 45%. That is why the most recent legislation on Qualified Mortgages, has put a cap on allowable debt to income ratios and require by law, the lender to document the borrower’s ability to repay the loan. I’m not a proponent for more government intervention as a whole, but to Jim’s point, you are putting yourself in a dangerous situation when pushing debt to income ratios this high.
I might also add, your timing could be off. Over the last 7 years we’ve seen the greatest buying opportunity of our lives in real estate. That insane bargain opportunity is largly gone and in most areas of the country we are very near where we we’re prior to the crash. Another indicator to be considered and prompt you to be cautious about your decision.
With Jim’s permission, I’d like to offer a free section of my book titled: The Rent Vs. Buy Conundrum: http://utahphysicianhomeloans.com/wp-content/uploads/2014/03/Excerpt-from-Chapter-1-Why-Physician-Home-Loans-Fail.pdf
Happy rental hunting,
I would be unable to sleep with 440K of student loan debt!!!! The last thing he/she needs is more debt! Home ownership is a great thing but being a slave to a house is not. Houses are a headache and an illiquid asset. I agree with WCI that you should rent. You really do not know you will stay in your current area. After all you have to find a job when you are done.
Renting is hands down the smarter move, but are you sure you can’t do better than $2200 a month? If you don’t have a family yet try to find a studio. My husband rented a tiny apt in a building owned by the hospital he trained at so rent was inexpensive. It was 400 sq ft but he only went home to sleep.
I couldn’t agree more with Jim’s advice. Not only would it be an unwise financial decision, you would be putting yourself in a risky situation. I had the same dream of owning during residency and ended up buying a townhouse for 127k. It worked out ok but after 3 years of residency I had paid for a new roof, new furnace and spent many hours of the rare free weekends fixing/remodeling my home. I enjoy that kind of stuff but most residents have no interest in replacing toilets, flooring and re-doing plumbing. If I hadn’t been able to do those things on my own I would have had significant debt added to my student loan debt which was about 30% less than yours. The upkeep of a home in the price range you are looking at would most likely be exponentially higher than my 127K townhouse. Not being able to pay your bills while you are in the middle of a busy and stressful rotation isn’t worth the headache. I think you would be much happier with a nice rental and keeping things simple while finishing your training.
Rent! Aside from the excellent points mentioned above, if you own a home there are inevitably going to be unexpected home repairs. These are not only expensive, the time you will need to spend waiting for repairmen is something you won’t have during residency. Having an apartment manager take care of it for you is worth more than money. It will help you keep your sanity.
In addition, you won’t be home much during residency, so now is the perfect time to save money by getting a small place and not accumulating any unnecessary stuff.
Great post!
Having owned 18 houses across the country I can verify that home ownership is not a dream, but a huge liability.
I currently own two rentals in a cheap party of the country, but rent in an expensive part. I pay $2,500 to rent a $650,000 condo. Just doesn’t makes sense to own it.
On the flip side, the rentals are worth about $200,000 combined. And they bring in $2100 in gross rental income.
Live where you want, buy what you can afford!
Rent and feel good about it. I rented during residency, sharing an apartment. I became an attending near the height of the housing bubble and still rented, despite my partners and mortgage broker trying to convince me I could afford to buy. I socked away money for two years, eventually bought a little starter home, lost 40% value when the bubble popped. Luckily since it was a starter home, I could pay extra towards the mortgage. Many of my partners are still underwater, can’t sell, can’t even refi at the low interest rates. Seven years later, although still an investment loss, the house is owned free and clear, generating rental income, and we are living in our dream home.
Take it from me, someone who bought in 2005 a “starter” condo for $280,000…
owner-occupied real estate is not an investment
owner-occupied real estate is not an investment
Repeat as needed.
I have kept the condo, and at this point the mortgage is about equivalent to rent of a comparable unit in Chicago. The condo board does not allow me to rent the unit to others, so my options are continue to live in it or sell for a loss.
When I sell real investments, even at a loss, I am allowed to use the loss to offset any taxable gains. If I don’t have taxable gains, I can carry the loss forward until I do or deduct some of the loss from my taxable income. You cannot do this with an owner-occupied home.
Rent and use the excess to pay-off some of the debt. Or put the money into ROTH IRAs and buy some REITs if you want to have exposure to upside.
Worst case scenario, convince your wealthy family to buy the home and you will pay them rent. They didn’t become wealthy by making bad investments, and if they are unwilling to commit the capital when they have a guaranteed tenant, then that should tell you that the “investment” in the home is not worth it.
I’m seeing a ton of this desire to buy a house from a number of younger clients and even personal friends, primarily in circumstances where it makes no sense at all. In some areas of the country, houses aren’t even staying on the market for a full day and are being sold way above the asking price. It’s amazing.
Don’t let emotion govern your big financial decisions.
I think this guy gets the point but I’ll try to add on a few other points that weren’t brought up. Even if you live in a high COL area, $2,200 is an insane amount to be paying for rent. You can ‘afford’ it but with 400k in loans it’s not a smart idea. I’ve only ever lived in high COL areas and I’ve never paid more than $700-$800 bucks, it can be done(Santa Monica, La Jolla, Newport Beach). Find a nice room in a large house or some roommates and you’ll save 1k/month right there on your housing.
With 400k in loans getting rich quick is out of the question. If you want to get rich at all, you’ll have to move to a low COL area like Texas after residency. Then buy a house and pay off your loans.
One final point is that buying with the plan to rent in a high COL area does not work – just run the numbers. Assume 40-50% of rent as expenses(industry standard) and you’ll see that you can not turn a profit in today’s market in California.
$440K in student loan debt and you are going into psychiatry?!? clearly, by the question you are asking WCI, money is just an abstract form for you. the absolute worst thing you could do is buy a house, not to mention one you clearly can’t afford.
rent! and rent cheap!
I think many Residents don’t realize the hidden cost of ownership either. Owning a house takes time and energy. You have to touch up the paint, you have to fix your sprinklers, you have to mow your lawn. I have a new home and I estimate I spend 30-60 minutes a week (more in the spring/summer and less in the fall/winter) doing stuff for it that I wouldn’t if I didn’t own. Also all of that stuff costs money.
Do you own paint supplies? Don’t forget the quarertly air filter change at $15 a piece. Lawnmower and edger…That will run you at least $400 plus gas and care.
Personally I love that about home ownership. I love working on and improving my home, but I also don’t work 80 hours a week.
We bought with a doctor loan in a decent market and lost our rear ends when we were finally able to liquidate last year.
As a resident, having someone else responsible for fixing broken things, paying for repairs, etc isn’t as awful as you may think. Markets could turn on you and you could have the home you really wanted to buy, except be 100k underwater when it came time to relocate for your first job… then what?
As a landlord, I would rent all day long to someone like you. Good credit, solid income, etc. Also, you’ll be there for awhile, so you could easily negotiate a decreased rental price for a 2 or 3 year lease – as landlord’s largest costs are turning over units… so having a good tenant for an extended amount of time is worth a discount… at least to me.
There’s a reason the ratios are there. It’s to keep you from having no money and starving. Do you really want to be in this spot for your residency? I’m sure you’ll have plenty of other things to worry about.
Also, don’t make the mistake we made when relocating. We looked at houses for 4 days straight, with a somewhat shoddy realtor and settled on a home we would otherwise have passed on. It’s been a money pit and we will probably move from it at some point. We should’ve rented our first year in the new city. We have a friend that rented for one year and then got exactly what he wanted. Honestly, I wish we had made that move.
I went to the Match Day after-party last night with my wife, and nearly every new-to-be resident stated they wanted to buy a house. Including someone with at least $300k in student loans. I did what I could to recommend against and shamelessly plug WCI for more information. I hope I convinced at least some of them to rent. Number one complaint? “I want to finally paint the walls…” You could paint them, then paint them back instead of buying a house, no?
We got the deal of the decade on a rental while my husband completes his residency. But it really needed a fresh coat of paint. I finally e-mailed my landlord and asked if I could paint it. They said my offer was the best Christmas present and offered to reimburse me for the paint. Win-win.
I am an attending and still renting. Have rented all throughout medschool and residency. We will buy a house once we settle down and know that we plan on living in the area long term.
Renting gives us freedom. We were not locked into a job because of it. My previous attending gig did not pan out like I thought. We were able to load up the moving truck. No worries about selling a house. No worries when something goes wrong with the house. When my wife says to
Me “what should we do because the septic tank backed up?”. Call the landlord. My answer every time. Nice feeling. Landlord has told me many times they wish they could just sell and not have any more headaches!
Rent, rent, rent!
When you are settled down financially, location, jobwise, etc. then buy. You are not there yet. Don’t give in to peer pressure!
The end of medical school and the end of residency/fellowship are major transition points. No matter what kinds of decisions and plans you lay now, they will need to be reanalyzed once your finish your residency. My renting, you’ll have much more flexibility to consider income opportunities outside of your local high cost of living area. Note I mention “income opportunities”. With your extremely high level of debit, you will not only need a laser focus on saving and investment, but also on maximizing your earnings. That may mean considering a combination of clinical practice and outside income sources (administration, partnership with industry, consulting with pharma, etc.).
Rent.
Reduce your loans.
Don’t take more loans.
Become a ninja of personal finance.
All of you preaching restraint seem to have a lot of faith in the future purchasing power of the dollar. Look at what’s going on with QE, do you still think it’s wise to gather and hoard this green paper, rather than use it to purchase shelter while still possible?
I begin med school this fall, probably in the south east (still haven’t decided where to matriculate) and I’m kind of itching to buy a house. Homes are a bargain out there, like 30k to 50k for a 3/2. I plan on staying in the area if I can for rotations and residency and afterwards as well (I live in So Cal so you can see why I am eager to start the rest of my life elsewhere). I would save on rent, and build equity. And if the dollar were to collapse so would my debt, and I would emerge with my real booty (so long as I can protect it from the hordes of zombies).
I would try to get a relative to cosign on a mortgage, use student loans, or maybe even buy a smaller place with cash. The benefits of a smaller place are it’s cheaper, and easier to rent out to the next crop of med students (since I’m sure most would rather live alone), should it become necessary.
You really think you’re going to want to live in a $30K house as an attending?
I guess if you really think inflation is going through the roof then buying real estate on a fixed, low-interest rate mortgage would be a very wise move. But as a general rule, people without an income probably shouldn’t buy houses.
I’m one of those medical students weighing the option of renting vs. buying. To be up front, I have significant medical school loans (not 400k). I want to rent and probably will, but the area I am living in has apartment and house rentals around 1400-1800/mo, where several friends of mine are paying 1000/mo for their mortgage. If I’m here for 5+ years, wouldn’t that money be better spent on a house, even if it isn’t the best return on investment?
The break-even point is usually about 4 years once you factor in selling/buying expenses plus the interest. I’ve owned for 4 years and I’ll walk away with about 5% (5,000) from the sale of the house after closing costs/fees. Plus, I paid about $4k a year in interest and never got to “deduct” any of it as I never itemized. Add in the new fridge I just bought last summer, and it would have been easier to rent. My wife starts residency in July and we’ll be in the same city, but we’re selling to move closer to the hospital and to eliminate risk. Something breaks while renting, we’ll call the landlord. We’re both busy professionals and the cost and time of ownership aren’t worth it. With my wife working 65+ hours, there’s little upside for her to spend her limited free time gardening, etc. Plus, I had two $1,000 deductibles on my house in the 4 years I’ve owned it. It’s a wash to me.
I usually am the dissenter in the buy vs rent debate. We bought our house in 2010 when my wife started her residency. It has appreciated considerably in that time frame. Our neighbors house (very similar to ours) recently sold for 30k more than we paid for our house. Buying a house isn’t rocket science. Obviously 2010 was a good year to be buying. We looked for a good neighborhood, good school district, ect and found a small house that fit our needs with motivated sellers. I also don’t buy the huge “hidden cost” argument. What kind of money pits are you guys buying? In my case cost to rent would have been $600 more/month than the mortgage, property taxes, and insurance plus I get to deduct the mortgage interest. Also, I personally don’t mind cutting the grass and staining the deck. Basically, owning has saved me thousands of dollars. Even with all that being said, in this specific case, I don’t see how anyone could advise this poster to buy over renting. Unfortunately, it’s relatively easy to get a physician loan. Certainly significantly easier than it is for everyone else to get a traditional mortgage. If one’s debt to income ratio is so bad that even the physician lenders turn the other way then you have a major financial problem on your hands. I would recommend renting as cheap a place as possible, and living a spartan lifestyle in order to pay back that debt. Depending on eventual post residency salary 25 years of IBR may also be a viable option (assuming the government holds up their end of the deal).
First, IBR is now 20 years to forgiveness, and this doctor is probably going to need that.
Second, timing is everything. I also bought in 2010 and it has worked out fantastically well. But It’s now 2014, and you and I have been in our homes 4 years already. Many residents who bought in 2010 have already finished residency, sold the house, and moved on. But move the timer back just 2 years, and I bet you’d be singing a different song!
Third, I am certainly familiar with lots of hidden costs. Roofs need replaced (I’ve done on both houses I own in the last 3 years), windows need replaced (I’ve done one of the houses and will probably do the other this summer), water heaters, air conditioners, remodels etc. It certainly does add up.
I certainly agree with you WC that 100% this person should be renting. I guess my general pont in the rent vs own argument, is that yes, everyone that bought in 2007 and 2008 got crushed but the bottoming out of the housing market provided a golden buying opportunity. Perhaps no one foresaw the housing bubble bursting, however, it was definitely obvious that the post bubble burst was a good time to be buying a home. I purchased a foreclosed duplex house in 2008 for $56,000. The bank was practically giving it away. In addition to now being a profitable rental house I refinanced it and used the cash to pay down high interest student loans. Great purchase, still own it, not an ounce of regret. I now say the same thing about our house house purchased in 2010. Obviously your home purchase in 2010 also goes in the win column. The argument for renting always references the buyers remorse suffered by those that purchased homes in 2007. Why then does the converse argument about renting instead of buying when the golden post bubble opportunity presented itself not apply? I feel like many times on financial forums renting is always urged regardless of a persons specific situation and perhaps it is not always truly the best financial decision. For most residents yes, but not for all.
Got off topic to beat the buying a home isn’t always evil drum but I feel badly for this physician. > $400,000 in debt? How is it possible that our government is willing to allow someone to borrow so much for an education? I don’t know what this person expects to earn but unfortunately, I would describe taking on this student debt load as an act of financial suicide. Many of my veterinary work colleagues have suffered the same fate. A recent graduate explained to me that he wouldn’t be able to eat without IBR as his loan payments without it nearly exceed his net salary. Forget saving for retirement, buying a house and living a life one would expect to live with a professional degree. I would say to this poster drop the idea of buying a house, cling to the life preserver that is IBR and hope Uncle Sam comes through in the end with the promised bailout.
I had another email recently with $457K of debt. It isn’t getting any better.
When I try to discuss the buy vs rent, I try to imagine a “normal” rate of house appreciation. In which case, buying for 3 years isn’t a wonderful choice. Obviously there are times when it is obviously a bad choice (2006) and obviously a good choice (2010) but I try to write for a general situation to make articles timeless.
I might be late to the game on this post, but just to offer an additional perspective:
Without a doubt, this new MD needs to rent! I also graduated in 2013 and started residency last July. My wife is also an intern this year, and we are combined making a little less than 100K with about 330K combined in student loans. We were fortunate enough to match in a low COL area and did in fact decide to buy, but only because conditions were perfect back in May 2013. We took out a physician’s loan with a 7/1 ARM at 2.49% on a $189,000, 3/2.5 home. My residency is 6 years, not 3 like a psychiatrist and my specialty will hopefully provide a little better earning potential. The home is brand new and major appliances and roof are under warranty for 3-10 years depending on the individual item, so we are crossing our fingers (and cautiously expect) that we’ll avoid large costs to ownership. The builder comes out periodically for the first year to repair and fix any problems as the home “settles,” no questions asked. Even still, small costs add up. Property taxes and home owner’s insurance combined are just over 2k/year. The MD in question needs to ask himself/herself what pros they have, if any, to offset all the cons in their financial profile outlined in the email.
Even with our favorable purchase conditions, I am already worried about the time and maintenance it will take to keep this house up for the next 5 1/2 years, plus the added stress of trying to sell once we get to that point. I must admit I do enjoy the work around the house, take pride in owning my home, and am overall happy with our decision to buy, but those selfish emotions are not worth the angst that comes along with purchasing a home (condo) for twice as much money (350-400K) in an urban area with a condo HOA that likely has restrictions on remodeling/renting/etc while you have astronomical student debt that is only going to grow during residency. Possible saving aside, you’re talking about nearly $1M in negative net worth before you get out of residency (and yes, you could sell the condo to recoup some of that, but you’d either end up buying something else or deciding to rent in the end anyway).
To that point, this MD should also be made aware of amortization schedules, and therefore not count on even close to 100% of the monthly mortgage payment going toward building equity. This is something many first time home buyers don’t realize. In reality, the amount of equity you can build in the first three (or even 15) years of home ownership on a 30-year mortgage is small. On top of that, I would bet this MD would need to pay well over $2,000/mo during residency just to keep interest from accruing on student loans, which is something to think about with the way PSLF is headed (my wife and I require ~$1900 on 330k @ 6.625%. The HOA fee alone in this MD’s example is nearly half my entire monthly mortgage payment. When it comes to home ownership in this particular case, delay, delay, delay! You simply can’t afford it.