Ramit Sethi's 6 Best Home-Buying Tips

The financial guru is not a fan of assuming people should buy a home. If they're going to, he suggests a conservative approach.

Ramit Sethi is not one to keep his thoughts to himself, especially when it comes to consumer manipulation. And to be clear, Sethi believes the "American Dream" of homeownership is brainwashing. According to the bestselling author of I Will Teach You To Be Rich, home-buying is not for everyone. What especially irks Sethi is when renters are considered less-than, as though they're not reaching for the brass ring.

Despite his gruff manner, Sethi has a heart for his million-plus followers. He considers the notion that everyone should own property propaganda offered by those who profit when homes are sold. He worries about those who buy into the propaganda, then find themselves in a precarious financial position.

For anyone thinking of buying a home, Sethi offers these six pieces of advice.

1. Look 10 years down the road

No one knows precisely what will happen in the next 10 years, but if you suspect you won't stay in a house for 10 or more years, Sethi recommends not buying. Otherwise, the fees associated with buying and selling the home will likely eat up any equity you gain.

According to Attom Data, the average amount of time homeowners stay in their homes before reselling is a little over eight years. Considering how much money you'll pour into a house in that time -- including insurance, furnishings, maintenance, and repairs -- it's easy to see that it can take some time to recoup those costs. Add to that the fact that it costs approximately 10% to sell your home and, Sethi points out, you could lose money.

2. Focus on the bottom line

Sethi says you won't often hear from people who've gotten in too deep or lost money on their homes. Still, he claims to receive hundreds of letters each month from homeowners in that predicament. That's one of the reasons he recommends finding a home with total housing costs of less than 28% of your gross income (before taxes).

And when he says "total housing costs," he means everything, including taxes, interest on the loan, maintenance, utilities, furnishings, and projected upgrades and repairs.

He realizes that 28% is less than a bank will say you can afford, but 28% means you're likely to have money left in your bank account when an emergency arises.

The exceptions, according to Sethi, are:

• If you live in a high cost-of-living area. In that case, he thinks it's okay to stretch your budget to 35% or 40%.
• If you have zero debt, Sethi says he'd stretch to around 33%.
• If you can realistically expect your income to increase soon. Again, he'd expand a housing budget to 33%.

3. Have at least 20% ready to go

Sethi has some controversial advice regarding down payment. On his blog, Sethi writes, "If you haven't saved a 20% down payment, you're not ready to buy a house."

Not only does putting 20% down avoid private mortgage insurance (PMI), it also gets you in the habit of saving before you're in a home. That way, you're accustomed to putting money away for unexpected expenses.

Here's the twist, though: Sethi says you don't actually have to put the entire 20% down on the house. For example, if interest rates are very low, it may make sense to put less down and bank the rest for emergencies.

The point is, you should be able to put 20% if you desire.

4. Be okay with deflated real estate values

If you're new to the housing market, you may not know that the housing market does not always go up (regardless of what a real estate agent or broker tells you). If you can shell out hundreds of thousands of dollars for a house, knowing that the value may wax and wane, you're in a good spot. Just don't move in believing your investment can only increase in value.

5. Do a gut check

Sethi advises that people think about how they feel when they consider buying a home. He says if it feels like an obligation or a pressure, just stop. Sethi himself rents and wants it to be an option for everyone who is not passionate about buying or ready to buy a property.

6. Trust the numbers

On The Long View podcast, Sethi told the host: "What happens is you have somebody saying, 'My grandma bought a house in Texas in 1970 for $200,000, and she just sold it for $600,000. She made $400,000 of pure profit.' But of course, if we dig into the numbers and we look at how much she spent on maintenance and taxes and interest, and then we compare all that plus your down payment to what you could have made by just simply investing in an S&P 500 fund for 0.1%, you often find that people could have made much more by renting, the key being they need to invest the difference. That's a big, big key."

Sethi suggests running your own numbers before making a final decision regarding buying a home. There's no hurry.

As Sethi writes on his blog, "Take your time -- there's no rush. Most of the time, when you hear people in a big rush to buy, it's not a careful consideration of facts -- it's fear that they'll be 'priced out,' or an emotional rush from seeing headlines of houses selling for way more than they can afford."

Slow and steady wins the race. The day will come when you have enough saved to purchase a home if you wish. And if you never want to take out a mortgage to buy a house, that's okay, too.