For new attendings, one peril of lifestyle creep is the appeal of buying an expensive home by leveraging “doctor loans.”
Although easier to attain, doctor loans have the disadvantage of not offering fixed interest rates.
Any new home purchase should be carefully considered, with factors such as student debt and job suitability assessed. Even if finances check out, physicians may want to set up an emergency fund to help cover unexpected costs that come with home ownership.
Fresh out of residency or fellowship, attendings become truly remunerated for their many years of education and training. To many, buying a fancy car and a big house may now be a manageable and appealing prospect.
But, before you squander the bag, it’s a good idea to carefully consider your options and avoid the liability of becoming “house poor.”
The truth about ‘doctor loans’
Physicians are in a special financial position. Although they typically carry significant student debt, and thus have a higher debt-to-income ratio (which typically means they wouldn’t qualify for a conventional mortgage), they also have immense earning potential. Because physicians are very likely to bring home higher incomes throughout their careers and are less likely to default on loans, banks are especially willing to accommodate loan requests.
Doctor loans can be obtained with only a low (or no) down payment ranging from 0% to 10%, and there is no requirement for private mortgage insurance. These loans also offer flexibility with regard to employment and debt-to-income ratio requirements.
One downside of doctor loans, however, is that they usually don’t have fixed interest rates and instead are adjustable rate mortgages.
Some young physicians may experience the phenomenon of “lifestyle creep,” in which making more money leads to spending more money. This can manifest itself in a variety of ways, including buying a more expensive home than what is affordable, says Anjali Jariwala, CPA, CFP, and founder of FIT Advisors, in an interview with MDLinx.
“People have a variety of reasons for wanting to upgrade their home,” she says, “[such as] a growing family, relocating to a higher cost of living area, or wanting to finally purchase their ‘dream home.’”
Jariwala says that individuals may purchase a home before considering the reality of their new mortgage payment.
"However, people may forget all the other expenses that come with a new or bigger home purchase, including higher property tax, higher homeowner's insurance, and higher utilities."
— Anjali Jariwala, CPA, CFP
“Homes also require ongoing maintenance costs, which can add up, [especially] if you purchase an older home,” she says.
Jariwala explains that because of these potential additional expenses, if you decide to purchase a home as a new attending, it’s important to have an emergency fund to dip into while getting used to new costs. It’s also a good idea to set up a separate home improvement account that can be funded monthly or annually.
Careful considerations for home buying
“A home purchase is usually the most expensive endeavor someone makes in their lifetime, so it requires thorough planning,” says Jariwala.
Considering that about 50% of physicians leave their first job within 5 years, there’s a high likelihood that changing homes may be necessary. This transition may require a physician to sell a home at a loss or become a landlord.
Thus, it may be a good idea to spend enough time at a job before deeming it a good fit, and thus purchasing a home in the local environs.
Most physicians usually know within one year whether a job is a good fit and if they will stay. This year can provide an important financial buffer.
It may also be a good idea to get a handle on your student loans first before adding the additional burden of new debt. During this time, cash can be saved and other important expenses tended to, such as a car, new clothes, or a much-needed vacation.
Being house poor
The prospect of being house poor is scary but relatively common among young physicians. Becoming house poor can leave little cash left over to save for the future or to cover emergencies. It can also result in a lot of undue stress that comes when money is tight.
"If you find yourself in a position where you purchased more home than you can afford, it is important to revisit your budget as quickly as possible."
— Anjali Jariwala, CPA, CFP
“Can you make cuts to your spending and lifestyle? Is there an opportunity to add an [accessory dwelling unit] to your property to yield cash flow to help offset the costs? Is your income on an upward trajectory where [finances] might be tight for a short while but then eventually will be manageable as your income increases? Whatever the situation may be, it is helpful to try and pre-plan as much as you can and always leave extra cash in reserves,” Jariwala adds.
When you struggle to pay your new mortgage
If you do find yourself straddled under the weight of a home mortgage, Lewis J. Altfest, PhD, CFP, CFA, CPA, PFS, shared the following suggestions with MDLinx.
Sell the house and buy a cheaper one. This is a radical decision and should be taken generally only when unavoidable—perhaps when you really overreached or on the occasion your income has permanently declined.
Temporarily reduce your cost of living by tightening your belt and watching expenses. It can often be easier than you might think.
Dip into your savings, but carefully. Tapping savings may be justified, particularly if your projected future pay raises will exceed the climb in the cost of living, and your shortfall is temporary.
Rent out parts of the new house, such as the basement, to bring in extra income.
See more patients when feasible.
Importantly, think beyond your current difficulties—often they are only temporary. Unless you have a history of overreaching, consider borrowing money temporarily from the bank, or a very close relative, to tide you over.
What this means for you
If you’re a newly minted attending, the appeal of home ownership is palpable. Although there are enviable mortgage options for new physicians, careful consideration must be taken as to whether a home—and all the associated expenses—are worth it. It may be a good idea to get a feel for your new job, get a handle on student loans, and save some money before taking the plunge.