Dave Ramsey Says to Do 3 Things to Feel Confident About Buying a Home. Is He Right?

Buying a home can be a great decision or a disastrous one depending on whether you're in a good financial position. You don't want to get a mortgage loan and commit to the costs and responsibilities of homeownership unless you're sure you can rise to the occasion.

If you aren't certain whether you are really ready, you may want to read Dave Ramsey's advice about three things you need to do in order to feel confident to purchase a home. He's absolutely right about two of these three things, and dead wrong about the last one, though.

Here's what Ramsey says you should do.

1. Keep your housing costs to 25% or less of take-home income

Ramsey's first recommendation has to do with how much of your income you should spend on your home.

"Limit your house payment to no more than 25% of your monthly take-home pay," Ramsey advises. "This payment includes principal, interest, property tax, home insurance, homeowners association (HOA) fees and, if your down payment is lower than 20%, private mortgage insurance (PMI) -- an extra fee added to your mortgage to protect your lender (not you) in case you don't make payments."

Keeping your housing costs to this percentage is advice everyone should follow. If you stretch to buy a home, you'll always be worried about where mortgage payments are going to come from and will spend your life living in a state of financial stress. You may also not be able to avoid going into more debt for other expenses, and saving for your future will be really hard if all your cash goes into paying for your home.

Lenders are often willing to allow you to borrow a little more than this, but you should avoid that temptation. Being house poor is not a fun way to live and you could be left with lots of regrets if you spend the maximum the bank will give you without taking other priorities into account.

2. Put enough money down on the home

Ramsey's next piece of advice relates to your down payment, or the money you put down to buy the house that comes out of your own pocket rather than from the mortgage loan.

"Ideally, you'll want to save a down payment of at least 20% to avoid PMI," Ramsey says. "For first-time home buyers, a smaller down payment like 5% to 10% is okay too -- but then you'll have to pay PMI."

PMI, or private mortgage insurance, typically comes at a cost of around .5% to 1.5% of the amount of the loan. This adds a lot of money to your monthly payments. You don't get the insurance protection from this, even though you pay for it. Lenders mandate you buy it if you don't put 20% down to protect them from losing money in case of default.

Avoiding PMI is just one of several good reasons to put money down on a home. If you have a good-sized down payment, you will have more lenders willing to lend to you at a competitive rate and won't have to worry much about ending up in a situation where you owe more than your house is worth in case property values fall.

Because of the big advantages of a down payment, Ramsey is right that you should aim for 20%. In fact, even first-time buyers should really try to hit this goal.

3. Opt for a 15-year conventional mortgage

Finally, Ramsey suggests that you should choose a 15-year fixed rate conventional mortgage. On this, he's very wrong. A 15-year mortgage comes with higher monthly payments, and you will be tying up a lot more of your money in your house.

Most people are better off getting a 30-year loan, and then investing the extra money they would have spent on mortgage payments, as you can usually get a higher ROI by investing than the return you get from avoiding interest.

If you can easily afford the monthly payments on a 30-year mortgage, are going to remain in your home for at least a few years, you have some emergency money saved, and you are able to make a good down payment, these are the key signs you should look for that will tell you it might be a good time to move forward with your home purchase.