How many of them did you check off your list?
- Dave Ramsey provided advice on when you’re ready to buy a home.
- He believes you should be debt free before becoming a homeowner.
- It also suggests that you will need to keep housing costs at 25% of your take home pay.
Buying a home can change every aspect of your financial life. You will have new costs to pay, such as a monthly mortgage payment. But you can also start building equity in your home and striving to own a prized possession.
You want to make sure you’re truly prepared for the major obligation you take on when you buy a home so you have the best chance of building wealth. But how do you know if you are in the right place to buy?
Finance guru Dave Ramsey has some advice on three things you need to do before you can buy a home – but should potential buyers follow them? Here are the three signs Ramsey says mean you’re ready to buy a home — plus some insight into whether you should really wait until you’ve reached that particular milestone.
1. When you have no debt
According to Ramsey, you need to be debt free before you are ready to become a homeowner. Ramsey has indicated on his blog that paying off other debts is a sign that home ownership is now affordable for you. He also prioritizes paying down debt over “small steps” that he says will lead to financial freedom.
While it might make sense to pay off high-interest debt before you buy, waiting until you’ve paid off every dollar you owe can be wasteful and counterproductive. If you have a car loan or personal loan with affordable monthly payments at a low interest rate and are otherwise ready to move forward with home ownership, there is no reason to continue. to pay rent and postpone your dreams of home ownership simply because you’re still having an outstanding loan balance.
Lenders will want to make sure that your total debt (including your new mortgage) does not exceed a certain percentage of income, usually around 36%. But if you’re below that threshold and can easily afford your mortgage and other loan repayments, you can probably move on without fully paying off affordable loans, especially if they have a long term. refund.
2. When you can make a big down payment
Ramsey advises making sure you can put at least 10% to 20% of what your home is worth before making a purchase.
On that, he is on point. You don’t want to buy a home with too little money because it could narrow your choice of mortgage lenders, increase the chances that you’ll owe more than your home is worth, and lead to higher borrowing costs.
Ideally, you’d make a 20% down payment, as this would give you the best chance of getting a low-rate loan approval from your choice of lenders – while also allowing you to avoid the additional costs of private mortgage insurance. . PMI protects against lender losses in the event of foreclosure, but you get no direct benefit even if lenders ask you to buy it, which they usually will if your down payment is less than 20%.
3. When a 15-year mortgage gives you an affordable monthly payment
Finally, Ramsey says you can afford to buy a house only if the monthly payment on a 15-year loan is less than 25% of your net salary.
The reality, however, is that most people don’t get a 15-year mortgage and they shouldn’t. These loans have lower total borrowing costs, but higher monthly payments due to their short repayment term. Higher monthly payments can lead to significant opportunity costs, as you lose the ability to do other things with your money, including investing, which could earn you a better rate of return than prepaying a mortgage. .
Ultimately, if you stick around for a while, you have an emergency fund, you can easily afford the 30-year loan payments while meeting other financial goals, and you can put at least 10% down, going ahead with home ownership may be a good choice for you.
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