Thinking about buying a house or already own one? See if you meet Dave’s guidelines for buying. If you don’t know who Dave Ramsey is, you can read a little more about him here. His book The Total Money Makeover drastically changed my financial life and shaped how I view and handle my personal finances today.
His guidelines are pretty strict and tough to follow, especially in high cost-of-living areas (e.g. SF/DC/NY/LA), but here they are:
- Be completely debt-free and have a fully-funded emergency fund (3-6 months worth of expenses). Being completely debt-free means you have absolutely no credit card debt, no car payments, no student loans, or any other debt.
- Save up a down payment of at least 10%, but preferably 20%. This is in addition to the fully funded emergency fund. It’s better to have 20% down so you can avoid PMI, but Dave is ok with 10% too.
- Have enough money for closing costs and moving expenses. Yes, on top of the emergency fund and a down payment, he wants you to have money saved for closing costs (typically 1.5-3% of sales price) and moving expenses so that you don’t drain your emergency fund at closing.
- Make sure the monthly mortgage payment is 25% or less of your take-home pay on a 15-yr mortgage. Yes, you read that correctly. He recommends a 15-yr, fixed-rate mortgage.
Until you’ve met all of these guidelines, he recommends renting. The reason for this is that he doesn’t want you to be house-poor. If your mortgage payment eats up most of your income, he says your house will be a curse instead of a blessing. If something breaks down, it could wreak financial havoc on your household and put you under a lot of stress which you could have avoided just by being a little more prepared.
Here’s where I think you can stretch these guidelines a little bit. If you have a relatively high income, you can survive on a smaller portion of your income. For example, if you take home $10,000/mo, you could have a mortgage payment that is 35% of your income and still have $6,500/mo left in your budget for other things. You just have to make sure to keep your lifestyle in check and live well below your means.
It’s very difficult to meet these guidelines in high cost-of-living areas (I’m in the DC Metro area). I personally took a risk and bought my first property without meeting all of these guidelines. I planned on having roommates for a few years. I provided them affordable housing, and they helped me pay my mortgage. I also wasn’t too far off these guidelines. Luckily, it worked out for me.
Out of all of these guidelines, I think the most important one is that you should try to be completely debt-free before buying. That way, the only debt payment you will have is your mortgage payment.
If you’re going through the homebuying process for the first time, I wrote a guide for first-time homebuyers (see below).
By the way, that’s Dave house in the picture above. He paid cash and didn’t take out a mortgage.
Photo source: biblemoneymatters.com