Given that housing is one of the largest expenses in a physician’s budget, and buying a house is one of the biggest investments a doctor will make, it’s not surprising that we see daily questions in our physician communities asking, “Should I rent or buy?” or “How much house can I afford?” We’ve touched upon both these topics in our physician’s guide to buying a house, but wanted to delve deeper into the many rules of thumb floating out there for how much you can afford to spend on a house since we see this topic come up so frequently. It’s essential that when you finally buy that dream house, you avoid the issues that so many physicians have if they overspend on the stereotypical ‘doctor house.’ These include not having enough money left over in their budgets to enjoy other things like vacations or eating out, not being able to cut back clinically because of cashflow issues, or not having enough money to set aside for retirement savings. Below, we cover practical approaches to how much you can spend on a house without feeling “house poor.”
While we understand that not all may apply if you live in a high cost of living area or have unique circumstances, we hope to help you arrive at a target purchase price that fits your specific situation.
Disclaimer: Our content is for generalized educational purposes. We are not formal financial, legal, or tax professionals and do not provide individualized advice specific to your situation. You should consult these as appropriate and/or do your own due diligence before making decisions based on this page. To learn more, visit our disclaimers and disclosures.
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House Buying Resources for Physicians
Our mortgage lenders for physicians can help you secure a mortgage that fits within your house buying guidelines. Our partners provide both conventional and physician loan options for doctors.
You can also visit our guide to mortgages for physicians and physician’s guide to buying a house to explore additional resources, including the differences between physician and conventional home mortgage loans.
How much house can I afford?
Determining how much house you can afford is about a lot more than just the purchase price of the home and how much money you have to bring to the closing table. It’s about how big the mortgage you’ll take on is, and about how many additional costs come along with the purchase and maintenance and expenses of actually living in that home. You’ll have to assess all these costs and the impact on your budget prior to deciding if you really can afford that doctor home.
So what factors should you consider? Your house’s cost and thus affordability comes down to several different factors working together, including:
Inspection costs before agreeing to a home purchase
Your down payment you pay at closing on the house
The amount of your home purchase you finance into a mortgage
Closing costs (typically wrapped into the mortgage)
Escrow amount including property taxes and homeowners insurance
Monthly or Annual HOA fees
Moving costs
Upfront renovations and improvements necessary to make it desirable to live in
Furniture (the bigger the house, the more it’ll cost to furnish)
Monthly utilities (the bigger the house, the more expensive electricity, heating, cooling, etc)
Maintenance, repair, and service costs (cleaners, lawn mowers, appliances, repairs, painting, leaf and snow removal, pest control, etc will all be more expensive with a bigger house and lawn, and the more than can go wrong)
Looking at all the different factors upfront at once can be overwhelming, and first time homebuyers might not know where to start when piecing all the different costs together.
Since the purchase price is by and large the largest factor for most physicians, most guidelines focus on targeting your house price range. Keep in mind, however, that in certain markets where property taxes or homeowners insurance have become increasingly expensive, your escrow fees can add up significantly in your monthly payment, so you’ll want to research them and include them in your assessment.
While some physicians can and choose to purchase a house in cash, the vast majority of doctors need to secure a mortgage, or possibly even a physician mortgage, where you put as little as 0% down as a down payment. Therefore, how much house you can afford may be determined what the lender is willing to loan you, although in our experience, what you should spend on a house is often less than what a bank is wiling to loan you as a physician. Banks love physician borrowers secondary to their steady income and their tendency to be rule followers and make payments on time, so they’re usually happy to give you more money, as they don’t have to live with the daily stretch on your budget.
To figure out how much house you can afford, we’ll look at guidelines below based on:
Amount you have saved for a down payment
Monthly household income
Monthly payments on debt and other obligations
Guidelines for your house down payment and a note on the physician loan
Your down payment is typically the largest upfront cost to consider when purchasing a home. While putting 20% down can save you from PMI on a conventional mortgage, and will help reduce the overall cost of your mortgage and thus house with interest, it isn’t a requirement, especially for physician homebuyers, many of whom take out physician loans for their first home purchase.
Physician loans allow doctors to put as little as 0% down, though keep in mind this will increase your monthly mortgage payment (as well as how much you pay in interest throughout the life of the loan since it’s on a larger amount).
Putting 20% down on a home can save you a lot and it is a good goal to target, but not having a 20% down payment doesn’t mean you can’t afford to buy a house. You will just need to make sure you can afford the resulting mortgage in your monthly budget. You’ll also generally want to make sure you’ll stay in the house long enough for its value to appreciate to recover your reduced equity in it. Otherwise, if you have to sell in a short amount of time, you risk having to come to the closing table with a potentially big check even if you sell the house for the same price you bought it for, because of realtor fees and other transactional costs.
Learn more on our physician’s guide to buying a home.
When looking at how much you have for a down payment versus how much you need to finance, it’s important not to use your emergency fund as your down payment. If anything, you will need to beef up your emergency fund once you become a homeowner, as things around the house immediately seem to break as soon as you move in. You want to make sure you have 3-6 months of mortgage payments included when calculating your emergency fund amount.
Leave your emergency fund for emergencies. It may even be a good idea to keep your emergency fund and house down payments in separate accounts so you don’t accidentally mix the money.
PSG Perk: check out our short-term investment options for special perks on accounts where you can keep your money for your house down payment while you save.
Mortgage interest rates and house affordability
While the purchase price on a home is a standard way to assess home ownership affordability, interest rates on mortgages factor in as well when financing. The higher the interest rate and the more of your house purchase you finance, the more the house will cost you over the life of the loan.
This doesn’t mean that current interest rates should prevent you from buying a home. Interest rates will always fluctuate, and the average over the past several decades was roughly around 7%-8%, so don’t let today’s interest rates in 2024 scare you just because they’re higher than the historically low interest rates of the past few years. Just make sure to factor in the length of your mortgage and the interest rate when considering the overall cost of a house to assess affordability and what you want to spend.
Learn more about deciding between a 15-year or 30-year mortgage or ARM.
One important point based on faulty advice or statements we often see physicians in our communities making - do NOT purchase a house assuming that you will be able to refinance to a lower interest rate later, and that these mortgage rates will just temporarily stretch your budget. As we just stated, interest rates in 2024 are not historically high, just high relative to the last decade, where a global pandemic and other factors caused historically low interest rates. While nobody has a crystal ball, you shouldn’t assume that your mortgage costs will be substantially lower in the future when thinking about how much house you can afford.
Assessing your debt-to-income ratio when purchasing a house
Banks love using the debt to income ratio as a way to judge how much they’ll lend you. However, it’s a good idea to do a quick self-assessment before you begin the house hunting process. As we stated above, especially for high-income earners, a mortgage lender will approve you for significantly more than you should probably spend or can realistically afford once you take into consideration other factors they ignore (monthly bills that aren’t debt like child care, goals to catch up to retirement, student loan repayment goals, vacations you’d like to take, malpractice and disability and life insurance payments, etc.).
Rules of thumb for how much house you can afford as a physician
Below, we list several common rules of thumb to help guide your decision on how much house you can afford. That said, don’t treat them as concrete requirements - while we’d love for you to be able to say your house purchase price meets as many of these criteria as possible, we know some will be more applicable than others, especially in high cost of living areas, situations where you have a lot of debt or childcare expenses, or other unique circumstances.
There are many different opinions set forth as rules that you can find online, and some are quite conflicting. The first two are our favorite for doctors, given our unique financial trajectory and situation.
At the end of the day, you want your home purchase to be a decision you're comfortable with so you can enjoy your home without regret or feeling trapped or house poor. You don’t want to face the decision between feeling this way and the headache of selling and moving. Your gut check is an important part of determining not just how much house you can afford, but how much you feel comfortable actually spending. If you find yourself violating the majority of these or all of these, it might be time to reconsider whether you can really afford the house that you want.
Physician Side Gigs Favorite: The < 2x your income for your mortgage rule
Because so many physicians take out physician loans with less than a 20% down payment, we love using the total amount of your mortgage to create rules about how much house you can afford for doctors over rules that are based on the purchase price of the home. Since you’re not always going into a home with 20% equity, some of the other numbers get skewed in other general rules of thumb. Conversely, some physicians don’t purchase a home until they have saved up a substantial down payment, or are lucky enough to be gifted or helped with the down payment by family, and then they may be able to buy a house that is much higher in purchase price than their annual income, because the amount being financed is significantly less than the purchase price. This rule of thumb states that your total mortgage amount should not be more than 2x your gross income.
Remember, your gross income is what you make before deductions are taken out of your paycheck such as taxes, insurance premiums, 401(k) contributions, etc. Learn more about gross versus net pay for your attending paycheck. This is an especially good rule for physicians who live in high cost of living areas and who may be better off renting until they can save up a down payment large enough to make their mortgage payments on their dream house more affordable.
Physician Side Gigs favorite: 20% rule
Many physicians are fortunate to have a higher income than the general population, and as such, while banks are willing to lend to a higher percent (see below for the 28% rule), we recommend keeping your annual housing costs to less than 20% of your gross annual income - this includes all of the expenses we talked about above.We recognize thisl may be impractical for physicians in high cost of living areas and who are at early stages of their careers with smaller down payments, but try to stick as close to this as possible. Doing so will ensure that you hit your retirement goals as well as do more of those indulgent stereotypical doctor life activities - vacations, Michelen star restaurants, cars you enjoy, memberships you want, schools you want to send your kids to, etc. Don’t put all of your indulgences in one basket or you’ll be stuck inside those four walls of that beautiful house more than you may like. If you spend 20% or less of your gross income on housing, and save 20% of your net income towards investments and retirement accounts, you’ll be well on your way to financial independence.
The 28% Rule
For a conventional mortgage, lenders typically work along the lines of the 28% rule. Under this guideline, your mortgage payment of your principal and interest (not including your escrow) should be less than 28% of your gross income.
By reversing the equation, you can get an idea of how much to budget for your house purchase. Take your gross monthly income and multiply it by 0.28 to determine the maximum mortgage payment you can afford for your house.
So if you have a gross monthly household income of $25,000 a month, you would want your mortgage payment to be less than:
$25,000 x 0.28 = $7,000
As a reminder, this is the maximum, and we think physicians should generally take on less of a mortgage than the bank will lend them. Be careful about inflating your lifestyle too quickly into a house you may not need but justify based on your paycheck. This is one of the reasons we recommend avoiding making too many large financial commitments early after finishing residency.
The 28%/36% Rule
During the mortgage approval process, a lender is going to look at your debt-to-income (DTI) ratio to determine if they will give you a mortgage and to determine how much credit they are willing to extend.
For recently graduated residents and fellows with high student loan debt, this can be a major hurdle. Physician loans help break this barrier by having different treatment for student loans when calculating your DTI.
Learn more about physician mortgage loans.
The 28%/36% rule takes the 28% rule a step further. Instead of just looking at your mortgage payment versus your income, it considers all your current debt obligations–this is your DTI ratio.
Under this guideline, your total household debt shouldn’t exceed 36% of your gross income.
Include in this 36% calculation your monthly minimum payments for:
Car loans
Student loans
Your proposed mortgage
Credit card balances
Personal loans
By keeping within these guidelines, you can help prevent a pinch in your monthly budget from feeling like your entire paycheck is heading out to other people. This can also help ensure that you pay yourself first and save for retirement while owning a home, which is a critical step on your way to financial independence.
The 3x Rule
The 3x rule is another common guideline when determining how much house you can afford. This rule looks strictly at your income, ignoring your debt.
Under this guideline, multiply your household’s gross annual income (before taxes and deductions) by 3x to determine the purchase price for your future home.
For example, if your household income is $325,000, then you should look at houses under
3 x $325,000 = $975,000
More conservative calculations suggest a 2.x rule or a 2.5x rule versus the 3x multiplier.
The housing market in your local area can largely dictate how well this particular rule works. It is, however, a reminder to be cautious in your house purchase, taking your entire financial situation into consideration so you don’t become house poor.
Buying a House in a High Cost of Living (HCOL) Area
Whenever we discuss these rules on our physician communities, those members living in California, the New York metro area, or other big cities and HCOL areas are quick to point out that these rules can’t possibly fit their situation. This may very well be true. Living in a HCOL area, while it has its benefits, also means you don’t get the benefits of geographic arbitrage that other physicians in suburban or rural areas may. While doctors tend to be among the more wealthy and with the biggest houses in rural areas, it can feel like they can barely afford even the more modest houses in very high cost of living areas such as Silicon Valley or NYC. In this case, we still recommend looking at these guidelines, and then stretching them as minimally as realistically possible. You still need to save for retirement, and have money left over to do things like travel, and those needs don’t change because of the HCOL area. So yes, we know you need to spend more than the rules of thumb suggest, but try not to go further over them than you absolutely need to. Additionally, resist the urge to look at your house as an investment, even though those around you will tell you that your home value will always appreciate. There’s a lot of overpriced inventory right now, and with higher interest rates, affordability at the time of sale is a concern. A house is only worth as much as someone will pay for it, so know that if you have to sell during a downturn you may lose money.
Conclusion
We hope the guidelines above help you during the process of buying your first home. Make sure to reach out to our mortgage lenders for physicians while shopping for a mortgage for your new home. You can also visit our guide to mortgages for doctors before starting the process to help determine what questions to ask and what information to consider and compare when evaluating different mortgage options.
If you are transitioning into practice, check out our checklist for graduating residents and fellows for guidance on housing for the year after residency or fellowship before deciding to purchase a home.
Have a specific question unique to your situation? Feel free to reach out to the hive mind in our physician Facebook groups.