How Not To Become House Poor
Buying your first home after medical school is an exciting time. You are finally going to be receiving a real paycheck for all of the hard work you have put in for over a decade. It is tempting to jump right into the house hunt and buy the largest house you can afford. This can result in buying too much house and struggling to make payments or maintain the home properly.
Meeting with a lender before you begin looking for a home is always recommended because they can steer you in the right direction and give you a price range for loan qualification. In addition, there are physician’s loans programs that offer very generous terms in regard to a low down payment, potentially waiving mortgage insurance and other factors that will impact the size of loan you qualify for.
However, there is no substitute for doing your own due diligence and being deliberate about determining what size loan you should pursue, regardless of what the lender is offering. This requires an honest look at your finances, budget and long term goals.
What is “House Poor”?
Being house poor is when a large percentage of your take home income goes towards housing costs. This includes mortgage payments, taxes and insurance, utilities and home maintenance. Every home, regardless of age, needs continual maintenance. If you plan to hire a housekeeper or landscaper on an ongoing basis, these costs should also be included in your overall housing expenses. It is recommended that housing costs be no more than 25% to 33% of your total income before taxes. This will give you enough discretionary income to pay your other living expenses as well as save for future needs like college funds for your children and retirement. Some loan programs stretch these numbers and it is possible to qualify for a home loan that will be difficult to pay, depending on your personal lifestyle and budget.
The challenge with any general range is that it does not take your personal circumstances into account. This is why completing your own budget and analysis is advised. Look over what your current bills and obligations are. Consider how much you want to put away for future needs, how much you will donate to charitable causes, and what family hobbies or sports you participate in. This may require you to adjust the size of mortgage you want to be responsible for.
What Do Lenders Count in Debt to Income?
One of the key numbers lenders will look at to determine the amount the bank is willing to lend is debt to income. Basically they look at your credit report and take the minimum payments listed on the report for all debt. This will include car loans, student loans, credit card debt and the like. From there they establish an acceptable debt to income.
Many families pay significantly more than the minimum payment on debts. Lenders also do not count how much you are saving each month, how much insurance payments are, or how many children you have to support. They also do not consider lifestyle, the travel and entertainment budget, hobbies or sports you participate in or organizations that you may volunteer both time and money.
For this reason, considering your actual budget will provide a monthly mortgage payment that you are comfortable with managing. A home purchase is a long term proposition and buying a home that stretches your budget will increase the stress in your life, and impact the amount of discretionary income you have.