3 Rules To Follow When Buying a House, According to Dave Ramsey
From figuring out the right timing to choosing a mortgage program, buying a house requires a lot of financial planning and patience. If you rush into the decision, you could end up worrying more about your tight finances than enjoying the benefits that come with your new place.
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Dave Ramsey, a personal finance radio host and author, often advises his callers and readers on when and how to buy a home. In a recent post on X, formerly known as Twitter, Ramsey shared a video explaining three homebuying rules.
Wait Until You Have No Debt
If you still have student loans, credit cards, car loans or other debt, Ramsey’s advice would be to hold off on a home purchase. Otherwise, you risk struggling to juggle a hefty mortgage payment with your other obligations. Plus, having a high debt-to-income ratio could hurt your mortgage approval chances.
Ramsey’s “Baby Steps” to help you get out of debt, save money and build wealth include following the straightforward debt snowball approach to become debt-free. First, you write down all your debts ranked from smallest to largest. Next, while you’re paying at least the minimum payment on all of them, put spare cash toward the smallest debt until it’s gone. You can then use that payment strategy for the next-smallest one and so on.
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Leave Enough for an Emergency Fund
If you plan on draining your savings to buy a home, you should think twice about the risky financial move. “Rule number two is when you make your down payment, you need to retain enough to call your emergency fund, which is three to six months of household expenses,” Ramsey said.
The responsibility of a mortgage and home maintenance costs can already put a strain on your budget. By leaving a fully funded emergency fund, you’ll have a cushion to handle emergencies with less financial stress and a lower risk of accumulating more debt.
However, Ramsey also suggested putting down at least 20% toward your home if you can. This will save you from paying for private mortgage insurance, which is a typical requirement for conventional loans.
Get Only an Affordable 15-Year Mortgage
Especially when mortgage rates and home prices are up, you might feel tempted to increase your home budget or pick a mortgage program with a long-term or a variable rate. However, that may not be the right move. “The third thing is never take out more than a 15-year fixed rate, where the payment is more than a fourth of your take-home pay,” Ramsey said.
While you’ll have higher monthly payments, you’ll lose far less to interest than with a 30-year term. You also won’t deal with unpredictability and rate hikes, which are some reasons Ramsey strongly advises against adjustable-rate mortgages.
Plus, sticking to the mortgage payment limit of 25% of your take-home pay will leave more room in your budget. Just prepare to shop more carefully for homes and possibly plan for a larger down payment.
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