Should You Buy a House With a Small Down Payment? Here's What Dave Ramsey Thinks
- Dave Ramsey recommends putting down 20% when buying a home.
- If you've been saving for two years and don't have 20%, he suggests a smaller down payment could be OK.
- Ramsey doesn't recommend going lower than 10%-15% down.
You may be surprised about Ramsey's recommendation for the minimum down payment.
Saving up a down payment is part of planning to become a homeowner. Most, but not all, mortgage lenders require that you put at least some amount down when purchasing a property. The purpose of a down payment is to ensure you have money invested in the transaction -- and to help avoid a situation where the lender must foreclose and the house isn't worth enough to pay off the loan in full.
But, how much of a down payment should you put down? The answer can vary depending on your situation, but finance expert Dave Ramsey has some advice that could help you to make the right choice.
Here's Dave Ramsey's advice on down payments
Ramsey has made clear that the more you put down, the better. Ideally Ramsey suggests putting 100% down and paying cash for the entire home without getting a mortgage -- although he acknowledges this isn't an option for the vast majority of people.
If you're going to borrow, Ramsey recommended on his blog that you "aim for a down payment that’s 20% or more of the total home price." He suggests 20% is best to avoid private mortgage insurance (PMI) and to maximize the number of lenders willing to provide an affordable loan.
As he makes clear, it's riskier for lenders to allow you to borrow more than 80% of what your home is worth. So they will charge more and require you to pay PMI to protect them if you put down less than 20% of the house's value.
Is it ever OK to put down less?
Although Ramsey urges home buyers to put down 20% if they can, this isn't a hard and fast rule, and the finance expert makes exceptions.
"If you haven’t saved 20% after two years of intense saving, it’s okay to lower your goal to 15% or 10%, especially if you’re a first-time home buyer," Ramsey said on his blog. "But never buy a house with a down payment that’s lower than 10% -- otherwise, you’ll be charged so much extra in interest and fees."
Ramsey adds that while some lenders do allow down payments as low as 3.5% -- or even no down payments at all -- putting so little down could leave you underwater. That would mean you owe more than the home is worth, which could complicate your life in significant ways. Owning more than a house is worth could mean you're trapped in the house with no ability to sell or refinance unless you can bring cash to the table to cover the shortfall.
He also points out that a down payment below his recommended 10% minimum could come at a cost. "Remember, lenders who approve low-down-payment mortgages end up taking more of your money in the long run," he warned on his blog.
Should you listen to Ramsey?
While buying a house with 100% down usually makes little sense, Ramsey is likely right that you should try for a down payment of 20% if you can. And, like he says, it may work to go as low as 10% if that's not possible. You just want to keep in mind how that can affect the overall cost of the mortgage. A mortgage calculator can help you play around with the numbers to get an idea of how a down payment impacts costs.
You don't want to wait forever to get on the property ladder since you can start building equity and benefitting from home appreciation as soon as you buy. But you also don't want to take a huge risk and pay a lot of extra costs by putting nothing or very little down.
Before you jump in, consider the interest rate you qualify for, your financial readiness to buy a home, and your ability to save up at least 10% to put down when you're deciding what's right for you.
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