Dave Ramsey Warns You to Avoid This 'Risky Real Estate Trend.' Should You Listen to Him?

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  • Some lenders offer down payment loans for real estate, but Dave Ramsey calls this risky.
  • There are some huge downsides to a down payment loan, including possibly ending up underwater on your loan and increasing your housing payments.

Don't jump on the bandwagon and take part in a trend that could leave you regretting your home purchase.

When you buy a property, you want to make smart decisions about what home you purchase and what type of mortgage you get. Unfortunately, Dave Ramsey has warned that a number of buyers are falling victim to a risky real estate trend that could end up coming back to bite them.

Ramsey is absolutely right that this trend is a dangerous one, so you should make absolutely sure you're avoiding it when you purchase a home of your own.

This is the real estate trend Ramsey warns about

The dangerous real estate trend Ramsey has warned about has to do with your down payment. This is the money you put down on a property before the bank lends you the rest. Unfortunately, some buyers are not actually putting anything down at all because there is a loophole that allows them to avoid it.

"Another risky real estate trend to avoid is taking out a personal loan to fund a down payment," Ramsey said.

Buyers may be tempted to do this if they're hoping to get into a house quicker. Since almost all mortgage lenders require you to put something down on a home, borrowing money from elsewhere can allow you to technically meet this requirement (in some circumstances), even when you aren't actually fulfilling the spirit of the down payment mandate.

"That's the same as buying a home with 0% down," Ramsey said, referring to the process of using a down payment loan. "You borrow the entire cost of the house—except this way you borrow it from two different companies at two different interest rates (which means twice as many headaches)."

Here's why a down payment loan is such a bad idea

Down payment loans can seem like a shortcut to homeownership, but they are a fast track to financial disaster.

If you do not put any of your own money down on a property, then you face a huge risk of not being able to resell your house for enough money to pay your mortgage and all your closing costs. This is true even if property values go up, if you have to sell in the short term. And if property values go down, you could find yourself in a really bad situation.

If you sold your home for close to what you paid for it a few years after buying, you'd have real estate commission and closing costs to pay on top of repaying your mortgage -- and your down payment loan, if you had one. With real estate commissions alone typically coming in at around 6%, you'd be in real trouble if you put nothing down.

Ramsey also warns that your down payment loan will just make your housing costs more expensive, thus making it harder to do other things with your money. "Buying a house with anything less will keep you from reaching other financial goals because you'll have to pay too much extra in interest and fees."

Finally, the last hurdle is that borrowing for your down payment isn't allowed with many lenders. That means you may not be able to go through with this plan if your lender discovers where the down payment money came from (which they will when they review your financial statements). And, if you can find a lender that permits this, you should be wary of their business practices.

Ultimately, you should listen to Ramsey's advice, avoid down payment loans, and aim to come up with money of your own to make a down payment before you move forward with homeownership.

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