Buying a home is one of the most significant financial decisions you’ll ever make, and financial expert Dave Ramsey is known for his strong opinions on how and when to take the plunge. He argues that one can get into financial stress, debt, and even disappointment if they jump into being a homeowner without proper preparation. However, he recommends a list of essential steps that need to be done before putting pen to paper. Is he right? Or are things more flexible in his approach?
Ramsey’s advice is too rigid for some people, but others swear by his method to achieve financial stability. Let’s go through the ten things he says you should do before buying a home and determine whether those things apply to today’s market.
You Should Have a Fully Funded Emergency Fund
Ramsey advises having an emergency fund of 3 to 6 months of living expenses before purchasing a home. It’s smart to do that because life happens and things come up; you get laid off from a job, your roof leaks, or your appliance breaks. If you don’t have a financial cushion, unexpected expenses can and do ruin your dream of homeownership.
Be Completely Debt-Free
If you’ve got car loans, student loans, or credit card balances, they can conspire to keep you from being able to afford a mortgage. Before buying a home, Ramsey insists on paying off all debt. Some may argue that a mortgage is ‘good debt’, but being debt-free will mean that you can manage home expenses without adding more pressure to your finances.
Have a Stable Job and Income
Having a steady income is essential for making a long-term commitment, such as homeownership. Ramsey suggests two years of steady income, preferably in the same field. This will reassure lenders and you that you can make comfortable payments.
Stick to a 15-Year Fixed Mortgage
Ramsey’s insistence on a 15-year fixed mortgage rather than the more common 30-year option is one of his most debated points. His reasoning? It will save you tens of thousands in interest. This is true, but if you buy a home with a 30-year mortgage, you have some flexibility and lower monthly payments letting you to invest or save in other places.
Keep Your Monthly Payment Below 25% of Your Take-Home Pay
Ramsey advises that take-home pay should not exceed 25% of mortgage payment, including taxes and insurance. This prevents homeowners from becoming ‘house-poor’ and unable to afford anything but their mortgage. Ramsey’s guideline to deter homeowners from spending more than 30% of their income on housing is reminiscent of a study by Harvard’s Joint Center for Housing Studies, which found that nearly 42.9 million homeowners are cost-burdened, spending more than 30% of their income on housing.
Budget for Homeownership Costs
A home can accrue a hefty group of expenses besides your mortgage: repairs, maintenance, HOA fees, and property taxes. According to Ramsey, these costs should be factored into your budget before you make a purchase.
Understand the Market Before Buying
According to Ramsey, timing matters, and it is best to know the market conditions before buying a home. This involves identifying price trends, interest rates, and economic factors. You can’t always know what the market will do, but you can prevent missteps when you know the trends.
Plan to Stay Put for a While
Ramsey recommends staying in your home for at least five years because buying a home is a long-term commitment. Selling too soon can lead to losses, especially with closing costs and realtor fees. According to one Redfin study, the typical American homeowner sticks around their home for approximately 11.8 years, so long-term ownership does make financial sense.
Save for a 20% Down Payment
Ramsey advises homebuyers to put 20 percent down to avoid private mortgage insurance (PMI). PMI isn’t the end of the world, but it’s an extra cost that you could avoid if you wait a little longer to buy a home. Some first-time homebuyers pay around 8% for their down payment and opt for a smaller initial purchase amount.
Avoid Emotional Home Buying
Ramsey warns against falling in love with a home and making emotional decisions. He advises buyers to be smart and stay within their means and their needs instead of being carried away by a dream home they can’t afford. Making logical choices and taking a step back will prevent the financial regret you’ll have later on.
Disclaimer: The Finance Key does not provide and does not intend to provide financial, investment, tax, or legal advice. The information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by The Finance Key of such content or services. Please do your due diligence and use your discretion.
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