Deciding how much to spend on a house can be difficult to figure out. There are a number of calculators and guidelines available, but most of them weren’t designed with physicians in mind. These calculators would have doctors spending far more than they should on their houses.
Doctors should spend less than twice their gross annual salary on their home. Other traditional guidelines for estimating housing costs lead physicians to overspending. To avoid this, set your maximum purchase price to less than 2x your annual salary. For two physician couples, use the lower of your two salaries.
Why are the guidelines different for physicians? And are there other factors to buying a home that are unique to doctors? Read on to find out.
How Much Can A Doctor Spend on A House
This past year, Mrs. Average Doctor and I purchased our first home. It was an interesting experience for us because, like many other physicians looking for their first home after graduating residency, we had no experience with the homebuying process. Alongside things like deciding on location and school districts, we asked one of the biggest questions all homebuyers ask. How much home could we afford?
It turns out, the answer is a lot.
When you start running the numbers to figure out the price range for your future home that you can afford, you’ll find some general guidelines and rules like these:
- “Keep your housing costs to less than 1/3 of your income.”
- “Spend less than 25% of your monthly income on your mortgage and other housing costs.”
- “Keep your debt to income ratio less than 36%.”
Now, these guidelines would have worked really well for us when we were in residency. At that time, making around $100,000 per year combined, we were much closer to the type of home buyer that these rules our meant for.
But now, as attending physicians, our salaries were significantly higher. And these guidelines told us to buy a much more expensive house than we actually needed.
For example: Using the 25% rule which recommends spending less than 25% of your monthly income on housing costs, we were looking at buying a house worth over two million dollars.
So instead we used the 36% debt to income ratio rule because it also took into account our student loans. With this rule, we needed to keep our combined mortgage, student loans, and other debts under 36% of our monthly income. But even this calculation recommended a house worth well over a million dollars.
I don’t know about you, but I’ve never bought anything worth a million dollars. The biggest purchase I ever made was going to medical school, which only cost around $200,000. So I was a bit shocked when these calculators told me to buy a house worth more than a million dollars.
Could we do it? Actually, yes. According to general financial guidelines, we could have spent that much money on our home. And I know some doctors who have.
But is that really the best financial move? Should we be buying million dollar houses?
How Much Should Doctors Spend On A House
The thing about expensive homes is just that. They’re expensive. And as physicians, we’re perceived as the mega wealthy, but are we really?
It’s true that the average doctor makes between $225,000 to $350,000 per year, with some making even more, depending on their specialty, work hours, etc. And this does put physicians in the top 5%, if not the top 1% of wage earners in the country. But contrary to how you might feel after getting your first attending level paycheck, that does not put doctors in the ultra wealthy category.
Most doctors aren’t CEO rich, celebrity rich, athlete rich, or even influencer rich. They’re regular working people getting a late start in life with every day worries like child care, family, and student loans. That’s not to diminish the high earning potential of physicians. It just means that when you’ve lived 30+ years of your life making minimum wage or less, suddenly vaulting into the highest earning bracket doesn’t give you “I can do anything” money.
So when an online calculator tells you to spend more than you ever dreamed on your first home, realize that those calculators were not designed for doctors. Most doctors, especially those early in their careers, should look for a different rule.
Thankfully, there’s a guideline that does apply to physicians. And it’s an easy one to remember.
Spend less than 2x your annual gross salary on your home
That’s it. When buying your first home as an attending physician, you should spend less than two times your annual gross salary on the total cost of the home. That means a doctor making $250,000 could afford a $500,000 house while a doctor making $300,000 could afford a $600,000 house.
For those doctors married to other doctors, I recommend using just one partner’s salary when making this calculation. Preferably the lower one.
By following this general rule, you won’t only satisfy the requirements of all of the other homebuying guidelines, but you’ll also move into a very nice house without over-extending yourself financially.
Are There Reasons To Buy A More Expensive House?
With all that said, the 2x annual gross salary guideline is not a hard and fast rule. There are exceptions, reasons why a physician should spend more on the more expensive house:
Location
It’s well known in real estate that location is king. There are some locations where housing prices are so high that just to live in an average home, you may need to spend significantly more money. For example, in places like California, the average single-family home costs more than $800,000. Meanwhile, physician salaries are fairly unchanged.
In these situations, the traditional “25% housing costs” and the “36% debt to income ratio” rules can apply. Because let’s face it, even in an expensive area, you still need shelter.
The Homestead Exemption
The other major reason for physicians to buy a more expensive home is something known as the Homestead Exemption.
Disclaimer: I am not an accountant or a laywer. And nothing on this website, including this, is personalized financial advice. If you’re deciding to buy a home based on the homestead exemption or any other legal decision, you should probably consult your own legal professional.
With that said, the homestead exemption essentially is a legal provision that protects your primary residence from creditors. This is important for doctors because it means your primary residence is protected in case of a lawsuit. But keep in mind that the exact protections from the homestead exemption do vary by state.
I know at least one doctor who not only purchased a million dollar home, but also purchased the lots next to him and called them his “yard” based on the homestead exemption in his state where the protections are unlimited. “It’s kind of like having a savings account”, he told me.
I might not go that far. If this is something I were considering, I would check with a legal professional in my state to know what protections apply and I would probably still use the 36% debt to income ratio rule. Even if your state fully protects your home from creditors, you still need enough monthly cash flow to fund the rest of your life.
What Kind Of House Did The Average Doctor Buy?
As I mentioned earlier in this post, Mrs. Average Doctor and I just bought our first home. How much did we spend?
First, we used the traditional rules and spent months looking at houses way outside of our budget. Homes that cost $800,000+ in neighborhoods where we would probably be the lowest earners.
Then, we came close to purchasing a new build home that cost around $650,000. But we’re glad we didn’t.
Because finally, we decided on a new build house in a less expensive area of town costing closer to $500,000.
Why new build? Because the older homes we looked at still cost a lot and needed a lot of work. A new build in a less expensive area, but still an area we liked, seemed like a good deal.
And why is $500,000 better than $650,000? Because even though older homes needed work, new builds come with upgrades. We quickly learned that the price of a new build goes up fast when the vendors start offering you upgrades. But that’s a topic for another post.
In any case, we finally bought our first home. Our housing costs are not much higher than what we spent on rent in our previous apartment. So we can continue to invest monthly and work towards financial independence. Only now we get to do it while building equity (and while spending money fixing things around the house).
