I appreciate so much about Dave Ramsey’s baby step method, but what does he say about what you can afford for your house?
Purchasing a home can be a fun-filled activity. It’s fun when all those years you’ve committed to buying your dream house begin to materialize. Now you have a home you can call your own.
However, a popular personal finance expert, Dave Ramsey notes that it’s pretty easy to get lost in the elating news that you’ll forget to ask the very important question of “How much can I afford on a house?” Dave further explains that the size of the backyard or kitchen doesn’t matter. He reiterated that a home can be a burden and not a source of joy if you can’t afford to make a mortgage payment and necessary repairs.
Knowing the exact amount you can afford to pay for your house shouldn’t be difficult. As such, we’ll dig deep into some points that Dave Ramsey made to help you with this vital decision. Happy reading!
What does Dave Ramsey think about Buying a Home?
Dave Ramsey holds an opinion about numerous aspects of personal finance, of which buying a home is a part of it. Dave Ramsey’s opinion on buying a home properly details what you can afford. He also has a free mortgage calculator that you can use with your spouse. He believes in the importance of joint decisions in marriage, so he recommended that you speak with your spouse before taking any decision. Here are the steps that Dave Ramsey recommends:
Step 1: Add up the monthly income of you and your spouse. If your take-home pay is $3,000 and your spouse earns $2,000. That means you both have a take-home pay of $5,000
Step 2: Calculate your maximum mortgage payment by multiplying by 25%
Step 3: Use Dave Ramsey’s mortgage calculator to calculate your budget.
Step 4: Factor in the cost of owning a home. Dave recommends starting a sinking fund to achieve this.
What Does Dave Ramsey Think About Mortgages?
In Dave’s article titled “Mortgage Loan Do’s and Don’ts,” Dave recommended that the most ideal way to pay for a mortgage is by cash. Although this might sound pretty absurd, a lot of average income earners actually pay cash. He further explains that the temptation of purchasing a house without making down payments can be pretty tempting, but he explains that this decision is a bad one that can damage your finances in more ways than imaginable.
Dave Ramsey advises that homeowners shouldn’t pay mortgage companies more than 25% of what their take-home pay is. With a mortgage payment that’s easy to pay, you won’t be stressed and will have enough room for other financial goals.
Dave Ramsey also believes that you should opt for a shorter-term mortgage with a fixed rate. However, there are other factors you should consider. He recommends that you don’t just consider the rates but also the terms of the loans.
Dave also advises that you make a down payment of a minimum of 10% on your mortgage; he also advises that you don’t pay above 25% of what you take home monthly. While some mortgage companies may allow you to pay more than 25% of your monthly income, Dave advises against doing this. He described individuals that do this as being “house poor.” This is because they own a house they can’t maintain and may later end up losing their home.
In summary, Dave Ramsey believes that mortgages are good but they must be taken in a reasonable amount.
How Does Dave Ramsey’s View on Credit Score Affect Home Buying?
Dave Ramsey, just like some other personal finance experts advocate being debt-free. However, a major demerit to being debt-free is that your credit score will eventually turn zero. But this leaves you in a situation where you’ll find it difficult to prove to mortgage lenders that you’re creditworthy.
Rather than opting for a mortgage, Dave Ramsey suggests that you opt for Manual Underwriting. Manual Underwriting is a physical investigation of your capacity to pay off your debt. It’s used to verify your capacity to handle the debt you’re about to take on. Some of the information you’ll have to present include a history of rental payments and proof of income.
To get a mortgage via manual underwriting can be pretty tricky as you can’t just visit the bank and come out with the money you need. Here are some things that you’ll have to come along with:
1. Proof
You’ll be required to provide a lot of documents to prove that you’re financially buoyant to pay the sum of money you’re requesting. You will have to show a document for your income in the last 12 months. The lender will also request that you show proof of payment history on your last regular monthly expense. Some of these expenses include the following:
- Cable bills
- Utility bills that are not included in rent
- Rent
- Insurance payments
- Tuition fees
If you can provide necessary evidence within the stipulated time, then your chances of getting a mortgage increase significantly.
2. Make a Significant Down Payment
A normal mortgage loan will require between 10% to 20% down payment, but individuals with no credit score will be required to pay a minimum of 20% as a down payment.
What Are The Hidden Costs You Should Know About?
In Dave Ramsey’s article titled “The True Cost of Owning a Home,” he noted some hidden costs that may come with purchasing your home.
Beyond Mortgage
Most people think that paying your mortgage only involves paying back what you collected from your bank. What you’re paying for is more than that. Your monthly mortgage payment includes your principal, the interest, your property taxes, and your insurance premiums.
HOA Fees
A good number of complexes and neighborhoods require inhabitants to pay homeowners’ associations. These are paid monthly and are usually geared towards doing something that’ll benefit the community. Make inquiries from your real estate agent to know the exact amount you’ll be asked to pay as HOA fees.
Lawn Maintenance
You’ll need to come up with a maintenance plan if your new home features a lawn. The bigger and more exquisite the lawn is, the more money you’ll spend on maintaining it.
If you’re an adherent follower of Dave Ramsey’s baby steps, you’ll notice that the 6th Baby Step requires that you pay off your mortgage early. Dave advises that you use every extra money you can get to pay your debt. Dave is particularly keen on clearing your mortgage debt because it’s one of the most expensive debts to carry. He further explains that every month you’re making payments; you’re handing over a lot of money to your bank.
Here are some tips to paying off your mortgage debt early:
- Refinance your mortgage debt to a shorter term. Another advantage to this is that shorter-term loans carry a lesser rate than longer-term loans.
- Pay above the required mortgage payment. But before doing this, ask your lender if they charge prepayment penalties for doing this. Also, ask if there are any benefits for paying above the required monthly payment.
- Make an extra mortgage payment every year
- Make lump-sum payment to reduce your balance