Why Ramit Sethi Says 'You Should Not Trust Anyone When You're Buying a House'

No one else is looking out for your best interests.

A home is a major purchase, and it involves a lot of parties. While you go through the home-buying process, you'll work with real estate agents and mortgage lenders. There's a good chance the people you meet will seem nice and knowledgeable, so you could find yourself going to them with your questions.

Ramit Sethi recently talked to a couple who put their trust in a mortgage specialist, and he gave listeners a fantastic tip. He said "you should not trust anyone when you're buying a house."

That might seem over the top, especially if you feel like you have a great rapport with, say, your real estate agent. But as Sethi puts it, in his usual blunt fashion, "Every single person involved in the transaction looks at you as prey. You are their next BMW payment." It's important advice that some home buyers forget.

Why you can't trust anyone when buying a house

All the people you work with on a home purchase are making money on the deal. That means what's best for them isn't necessarily what's best for you.

Your real estate agent gets their commission based on the purchase price of the home. They make more if you buy a more expensive home, regardless of whether that's a good financial decision for you. The same is true with mortgage companies. They earn more in interest and fees if you take out a bigger mortgage loan.

This is exactly what happened with the couple who came on Sethi's podcast. They decided to buy a vacation home that they'd also rent out for passive income. When they needed advice, they went to their mortgage specialist. But after going through with the purchase, the reality didn't match their dreams. They ended up being stretched very thin and eventually realized selling the home would be the best financial decision, even though it could cost them $100,000.

None of this means that real estate agents, mortgage specialists, or anyone else involved in a home purchase are bad people or scam artists. They're doing their jobs, and they're not looking to exploit you. But they have their own motivations. You need to look out for yourself, because no one else will.

Making the right home-buying decisions

Buying a home is definitely one of those things you don't want to regret later. The way to avoid this is to do plenty of research and planning, either by yourself or with your spouse or partner, if you're buying a home as a couple.

Where this is most important is deciding how much home you can afford. If you spend too much on a home, it makes life stressful and could affect you financially for years. The usual rule of thumb is to keep housing costs to 28% or less of your pre-tax income. If you and your spouse bring in a combined $10,000 per month, you'd aim for $2,800 or less in housing costs. Keep in mind that housing costs include not just your mortgage, but also homeowners insurance and HOA fees.

The amount you decide you can afford might be less than what a loan officer thinks. That's why it's smart to figure this out yourself, because if you trust someone else, they could convince you to borrow too much. After all, they're not the ones who need to pay your bills every month.

There's nothing wrong with asking questions and getting other people's opinions. Just take everything you hear with a grain of salt, keep everyone else's incentives in mind, and make the decisions that are best for you.