How Much House Should You Buy? Here's What Dave Ramsey Thinks
- Buying a house that's too expensive can damage your finances.
- Dave Ramsey has some advice on how much house you can afford.
- He recommends keeping housing costs to 25% of income or less.
Should you listen to the finance guru when it comes to your housing budget?
There are many decisions you'll make throughout your life that can affect your finances. However, your choices about the house you buy can be especially impactful because a home is the biggest investment most people make and a mortgage is the largest debt most people have.
It can sometimes be difficult to determine exactly how much house you can actually afford to comfortably buy -- but this advice from Dave Ramsey could be the ticket to making a decision that's right for you over the long-term.
Ramsey suggests capping housing costs at a percentage of income
Personal finance expert Dave Ramsey provided some simple advice on making sure that the home you purchase is actually affordable for you.
On the Ramsey Solutions blog, Ramsey provided the following tip to set your housing budget: "Your monthly mortgage payment should be 25% or less of your take-home pay—including property taxes, homeowners insurance, private mortgage insurance (PMI) and HOA fees."
This would mean that if you bring home $4,000 per month from your job, you would want to cap your total housing costs at no more than $1,000.
It's important to note that this would include not just the principal and interest on your home loan, but also other ownership costs as well. For many people, property taxes, HOA fees, PMI, and home insurance are included in their monthly mortgage payment. Mortgage lenders collect this money in a special escrow account and pay the insurance bill, taxes, and fees on the homeowner's behalf once a year. But not everyone puts these payments into escrow, so if they aren't included in your mortgage, you'll still need to take them into account.
Is Ramsey right?
Ramsey is a little bit more conservative than most mortgage lenders are in determining how much house you can afford. Mortgage lenders also consider your housing costs relative to income when assessing the likelihood you'll be able to repay your loan. But, generally, most loan providers are willing to allow you to spend up to 28% of income on housing -- which could mean several hundred dollars per month more than Ramsey suggests.
Of course, you don't have to borrow as much as the bank allows. Whether you should stick with this common lender limit or Ramsey's smaller budget will depend on your personal circumstances. If you'd rather do a lot of other things with your money rather than spending it on housing, then you may want to stick with the 25% limit. This could be the case, for example, if you're interested in early retirement and need to invest a lot to build the nest egg you need.
On the other hand, if you live in a high cost of living area or having a home with certain luxury features is a high priority for you, then you may want to opt to spend a little more than Ramsey suggests -- as long as doing so won't compromise your security in the long run.
Ultimately, it comes down to where your priorities lie and what you can afford to buy based on where you live. But if you want to be sure your housing costs remain an affordable part of your budget, sticking to Ramsey's limit could help you do that.
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