"For the moment all discipline seems painful rather than pleasant, but later it yields the peaceful fruit of righteousness to those who have been trained by it". - Hebrews 12:11 (ESV)
The real estate marketing machine will try to convince you that "you need to buy a house right now", but be careful. This question of, "how much house can I afford?" is not necessarily the best first question either. So, to ensure your home is a blessing, complete these 10 "Dave Ramsey Approved" steps before you buy.
Keep in mind that, when to buy a house is a VERY individual decision. Like I mentioned earlier, the "machine" will bludgeon you to death with marketing platitudes like, "it's always better to be a homeowner" or "you're just flushing money down the toilet if you keep on renting".
And while there may be a grain of truth in those statements, it really all depends on YOUR individual situation in space and time when it comes to buying a home.
I mean, you want your home to be a blessing, not a curse, right?
Of course you do. I want that for you, too. And probably much more than you can see right now.
Why? Because I’ve personally bought and lived in a home that I had absolutely no business buying and that was a completely unnecessary burden and curse.
And I can tell you that it was not fun.
Actually it was torture.
If I would have had someone like me whispering in my ear, I could have avoided about 8 years of extreme suffering.
So, I’m whispering. Are you listening?
Want the downloadable pdf "guide" version of this post, click here or on the image above.
In fact, a big part of the reason I became a financial coach was to help people avoid the “financial traps” I believe are automatically set for us in this hyper-marketed-to consumer culture of ours.
If you ever listen to (or watch on YouTube) Dave Ramsey's daily show, you'll undoubtedly hear listeners call in and ask "how much house can I afford?". It's not a bad question, it's just a much bigger question than they normally consider and it requires A LOT of research, discernment all with the end in mind of making sure to avoid the pitfalls of home purchasing.
I believe home buying is potentially fraught with many of these "financial traps", especially if not done correctly.
So, my purpose here is to help you avoid what I had to live through which was a veritable sea of financial traps.
I was so traumatized by my first home ownership debacle, that I promised myself once I got out of it, I would NEVER let it happen again. I’m happy to say, I haven’t.
And so, that’s the background for our list.
Why? Murphy WILL show up, I promise. Roofs wear out/leak. HVAC units explode. Mold is “unexpectedly” discovered. If it can go wrong, it probably will.
Be prepared for it. Here are some ways to get there: “Dave Ramsey’s Baby Steps To Financial Peace”.
A fully funded emergency fund is what’s known as “Murphy Repellant”. That means, when bad stuff shows up, like the leaky roof and the exploding HVAC unit I mentioned above, you can just pay for it.
Stuff WILL happen. I want you to be financially prepared ahead of time.
For more info on how to assemble this emergency fund, check out this post: What Exactly Is An Emergency Fund? (And What It’s Not).
Why 20%? Because you will avoid Primary Mortgage Insurance (PMI).
PMI is an insurance policy that protects your mortgage company in the event that you default (can’t make your payments) and you get foreclosed on.
PMI is usually 1% of the total loan value and becomes part of your monthly payment.
I don’t know about you, but 1% of $100k, $200k, $300k+ is money I’d rather being earning interest on (in a mutual fund or something) rather than paying as a fee.
Remember, we recommend that your monthly mortgage payment (including association fees, taxes and insurance) is no more than 25% of your (after tax) take-home pay.
We don’t want you to be “house poor”, meaning that your payment is so high, you can barely afford groceries or gasoline to get to work.
That’s one of the ways we talked about earlier that a house can be a curse.
I did all the dumb stuff so hopefully you don't have to. :)
This would include: appraisals, home inspection, attorney’s fees and homeowner’s insurance.
You may need a small pile of cash to cover these.
This would be set apart from your emergency fund in number two and put into a "sinking fund". We'll cover more about sinking funds in later content.
Remember, we recommend a 15-year fixed mortgage (NOT a 30-year).
Yes, the monthly payment is higher with a 15-year, but the overall cost of the home is MUCH lower over the life of the loan, typically hundreds of thousands of dollars.(Check out Dave Ramsey's example below #9.)
AND, you will also pay off the home in half the time, literally.
Remember, we want you to be EARNING as much interest as you can (i.e. investments, mutual funds, etc.) and PAYING as little (preferably no) interest as possible (i.e. debt).
Some other loans types to avoid: Adjustable-Rate Mortgages, FHA Loans and VA Loans.
I’ll go into more detail about these in other content, but suffice it to say for now, steer clear of these.
The heart of a teacher with you. The skills of a warrior with the world.
You need someone who “gets it”. And what they "get" is that this is a major purchase and must be done right.
It needs to be someone who’s not going to pressure to go “outside your comfort zone”, particularly with regard to price range and 15-year mortgage options.
Interview agents until you find the right fit. And don’t give up until you do.
This is too big a decision to mess around, trust me. Relying on “uncle Joe”’who “dabbles on the side” is not who we’re looking for here.
We need a trained professional who is out to find you the best possible value for your dollar and knows how to navigate all the complicated twists and turns of the home buying process all with the heart of a teacher.
Make sure to scour the report and ask a lot of questions. In particular be on the lookout for things like mold and cracks in a foundation.
Although many issues can be fixed, being aware of them may give you negotiation leverage up to and including walking away from the sale.
How do you know if you're "ready" to buy a home? It's not easy to know "for sure". The real estate/mortgage industrial complex will try to convince you that you are perhaps when indeed your are not. Make sure to complete these 10 steps before you buy, to ensure your purchase is a blessing and not a curse. Be careful out there.
If you’re finding the whole home buying process to be a bit of a dead end this time around, it’s always okay to stay where you are (if you can) and rent for a while.
It’s not a waste of money (even though it feels like it is) to rent for a period of time while you’re trying to find the right fit for you and your family.
Renting for a year is a whole lot cheaper than making a bad decision with a 30-year mortgage attached to it.
Here is Dave Ramsey’s excellent analysis of how a 15-year mortgage saves you hundreds of thousands of dollars.
"Let’s check out the difference between a 30-year term and 15-year term on a $250,000 home with 20% down. That means your mortgage loan amount would be $200,000.
A 30-year mortgage on a $200,000 loan with 5% interest has a payment of $1,074 (not including property taxes and insurance). On that same house, the payment on a 15-year mortgage with a 4.5% interest rate would be $1,530. That’s a $450 difference every month.
That may not seem like much but take a look at the bigger picture. When you pay $1,074 a month for 30 years at 5% interest, you are actually paying $386,000 for your $200,000 mortgage loan. Yikes!
Now, how do those numbers work for a 15-year mortgage? A monthly payment of $1,530 for 15 years at 4.5% interest will equal $275,000. So if you go with the 15-year mortgage, you’ll save yourself over $100,000 over the life of the loan!"
Remember, this is a huge decision and it’s your future and your money.
You’ve got to get this purchase right!
If something isn’t right, “smells” funny and/or if your agent is putting too much pressure on you, walk away.
I’ve heard it said that opportunities are like buses. There is always another one coming.
There will be push back on these ideas. Possibly first by you. Then, perhaps by friends and family. Then, even perhaps by a real estate agent you’re already working with or considering working with.
I just want you to be prepared for this resistance. These ideas are counter-cultural and there are many “arguments” against them.
I feel like I’ve heard most of them at this point. If there are others you’ve heard that I haven’t, please leave them in the comment section below.
Being financially healthy and prepared for home ownership will make the difference between joy and regret over the next several decades of your life.
I want you to be more in the joyful category and NOT AT ALL in the regret category.
Be prepared to resistance to these ideas. They're considered "weird" in our financially illiterate culture.
Argument: “Your monthly mortgage payment will actually be less than what you’re paying in monthly rent.”
Response: That may appear to be true from a monthly viewpoint, but if you purchase the home with a 30-year mortgage (instead of the 15-year we recommend), you can actually pay upwards of 1.5 to 3 times the actual purchase price of the home over the course of the mortgage (see the Dave Ramsey example above). Is that really “saving money? Have you actually taken the time to do the math? (Don’t worry, I didn’t either the first time around.) :)
Argument: "Renting is like flushing money down the toilet, right?"
Response: Renting until you’re totally out of debt and financially sound enough to ACTUALLY be able to afford a house is ALWAYS a good idea. This will ensure your home is a blessing and NOT a curse.
Argument: “I’ve always been taught that owning a home is the “adult” thing to do."
Response: I know, I’ve heard this one my whole life, too. But understand that buying a home is only the “adult” thing to do when you're financially prepared to do it. If you can confidently check off the 10 items on the list above, then you’re likely ready. If not, the adult thing to do is to what until you are ready.
So this list is all about you and your family being able to enjoy your home and to not being a slave to it.
It’s about helping you make the right decisions at the right time in every single step of the process.
As you likely realize, your home is such a huge purchase that if done poorly, can turn into an anchor that drags you to the bottom of Loch Ness really fast.
Not good! There are monsters down there! :0
Suffice it to say, I only want for you to be in a position of strength so that you can actually enjoy your home. And, I want to help you to minimize any hardships that can often come along with home ownership gone wrong.
Let me know your thoughts in the comments below and let’s keep the conversation going.
0. Stop All Retirement Investing (Until Step 4)2. Starter Emergency Fund of $10003. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)4. Full Emergency Fund of 3-6+ Months’ Expenses5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)6. College Funding (if applicable)7. Pay Off The Home Mortgage8. Build Wealth, Serve, Be Ridiculously Generous And Go FI (Financial Independence)!