Dave Ramsey Says You Can Afford to Buy a Home Only if These 3 Things Are True
How many of them have you checked off your list?
- Dave Ramsey has provided advice on when you're ready to buy a home.
- He believes you should be debt free before taking on homeownership.
- He also suggests you'll need to keep housing costs to 25% of your take-home pay.
Buying a house can change every aspect of your financial life. You'll have new costs you're responsible for, such as a monthly mortgage payment. But you'll also be able to begin building equity in your home and working toward owning a valuable asset.
You want to make sure you're truly ready for the major obligation you're taking on when you buy a home so you'll have the best chance of building wealth. But how do you know if you're in the right place to buy?
Finance guru Dave Ramsey has some advice on three things you need to do before you can buy a house -- but should would-be buyers follow it? Here are the three signs Ramsey says mean you're ready to buy a home -- along with some insight into whether you should really wait until achieving that particular milestone.
1. When you don't have any debt
According to Ramsey, you need to become debt free before you're ready to move forward with homeownership. Ramsey indicated on his blog that paying off other debts is a sign that homeownership is now affordable for you. He also prioritizes debt payoff on the "baby steps" he suggests will lead to financial freedom.
While it may make sense to pay off high interest debt before you buy, waiting until you've paid back every dollar you owe may be unnecessary and counterproductive. If you have a car loan or personal loan with affordable monthly payments at a low interest rate and you're otherwise ready to move forward with owning a house, there's little reason to keep paying rent and to put off your homeownership dreams just because you still have an outstanding loan balance.
Lenders will want to make sure your total debts (including your new mortgage) don't exceed a certain percentage of income -- usually around 36%. But if you're below this threshold and you can easily afford your mortgage and other loan payments, you can probably move forward without fully repaying affordable loans -- especially if they have a long payoff time.
2. When you can make a hefty down payment
Ramsey advises making sure you can put down at least 10% to 20% of what your home is worth before making a purchase.
On this, he's spot on. You don't want to buy a house with too little money down as doing so can narrow your choice of mortgage lenders, increase the chances you'll end up owing more than what your home is worth, and lead to higher borrowing costs.
Ideally, you'd make a 20% down payment as this would give you the best chance of getting approved for a loan at a low rate from your choice of lenders -- as well as allow you to avoid added costs of private mortgage insurance. PMI protects against lender losses in case of foreclosure, but you get no direct benefit even if lenders require you to buy it -- which they usually will if your down payment is below 20%.
3. When a 15-year mortgage gives you an affordable monthly payment
Finally, Ramsey says you can afford to purchase a home only if the monthly payment on a 15-year loan is below 25% of your take home pay.
The reality, however, is that most people don't get a 15-year mortgage and they shouldn't. These loans have lower total borrowing costs, but higher monthly payments due to their short payoff time. The higher monthly payments can come with serious opportunity costs as you lose the chance to do other things with your money, including investing, which could earn you a better rate of return than early mortgage payoff.
Ultimately, if you'll be staying put for a while, you have an emergency fund, you can easily afford the payments on a 30-year loan while accomplishing other financial goals, and you can put at least 10% down, moving forward with homeownership may be a good choice for you.
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