These Are the Biggest Mortgage Mistakes, According to Dave Ramsey
- Getting a mortgage is a major decision that affects your finances for years.
- It's important to plan ahead and get the right mortgage for you.
- Finance expert Dave Ramsey says you need to prepare for closing costs, at least a 10% down payment, and several other things.
Are you at risk of making these mistakes?
If you're borrowing to buy a home, you're making a huge financial decision that's going to impact your life for decades to come. You don't want to make the wrong choices. Fortunately, finance expert Dave Ramsey has called out nine common mortgage mistakes people make.
By reading about these big errors, you can make certain you avoid them and maximize the chances you'll get a loan that's right for you.
1. Taking out a mortgage you can't really afford
Ramsey has a stern warning on his blog about borrowing more than you can comfortably pay for a home.
"Taking on more mortgage than you can afford is like dropping an atomic bomb on your budget," the finance guru's website states. As he goes on to explain, stretching to make monthly payments can make it difficult or impossible to cover other bills or accomplish any financial goals.
Ramsey has advised keeping total housing costs -- including your mortgage, property tax, and home insurance, to no more than 25% of your take-home pay.
2. Making too small of a down payment
A small down payment creates a lot of risk for borrowers, as well as making your mortgage costs more expensive. You could end up owing more than your home is worth and paying lots of added costs if you don't put money down.
Ramsey has indicated the bare minimum down payment you should make on a home is 10% -- and ideally advises putting at least 20% down when you get ready to make a purchase.
3. Not preparing for closing costs
Ramsey warns that many people focus so much on saving for a down payment that they forget to take other crucial costs into account. Specifically, people forget about closing costs and moving expenses.
If you aren't prepared for this expense, you could end up scrambling to come up with closing costs, having to borrow to pay them, or even going into additional debt for your closing fees and moving expenses.
4. Failing to get pre-approved
Getting pre-approved for a mortgage means submitting your financial credentials to a lender before moving forward with buying a home. Ramsey says this step is crucial to help you get an offer accepted on a home.
"A mortgage preapproval letter not only tells the seller you're a serious buyer, but it also says choosing you means the paperwork process will move faster," his blog states.
5. Choosing the wrong type of mortgage loan
There are many different kinds of mortgages, as Ramsey points out. These include adjustable-rate mortgages, FHA loans, and VA and USDA loans. Ramsey suggests avoiding many of these loan types, which he says are "designed to get you into a house no matter your financial situation."
Instead, he suggests taking out a 15-year fixed-rate conventional mortgage. This mortgage advice isn't necessarily right for everyone, though, as it's important to take opportunity costs into account since the 15-year mortgage is more expensive each month than its 30-year counterpart.
7. Getting someone to cosign a mortgage
If you need someone to cosign your mortgage, it's probably because you can't really afford the house on your own. Ramsey warns you could end up struggling if you make this error and your payments end up being difficult to make.
8. Paying for mortgage points
Mortgage points allow you to prepay interest by paying a percentage of your loan upfront. Ramsey advises avoiding points because you often end up refinancing, repaying your loan, or selling before breaking even for the upfront cost. Instead, he suggests simply using the extra money you'd spend on points to make a larger down payment and borrow less.
9. Borrowing more while closing on a home
The final mistake Ramsey recommends avoiding is taking on additional debt while in the process of closing on a home. This can be a red flag for mortgage lenders and could cause problems with closing on the deal.
Fortunately, avoiding these mistakes is simple now that you know about them. Be sure you steer clear of errors that could end up costing you during the home-buying process.
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