Buying a home is a huge financial step -- one you can't afford to botch. Thankfully, there's a world of great advice about home buying, so if you're new to the process, you don't have to go it alone.
Dave Ramsey is a financial guru it can pay to listen to when buying a home. Ramsey has long shared financial advice to help people make smart decisions and avoid unhealthy debt. Here are some of Ramsey's top mortgage tips for home buyers.
1. Assess your finances
Before you buy a home, make sure you're in a strong enough financial position to take that leap. Ramsey says you should check off two boxes at minimum:
- Have an emergency fund with enough money to cover three to six months of essential bills.
- Have enough money for a 10% down payment on a home, though 20% is ideal, as it lets you avoid private mortgage insurance, a costly premium added to your monthly payments.
Taking these steps should help you approach the home-buying and mortgage application process with more confidence. Just as importantly, they help ensure you can manage your mortgage payments even if life throws some financial curveballs at you.
2. Don't let a lender decide how much house you can afford
The amount you qualify to borrow for a home may not be an amount you're comfortable borrowing. Ramsey says you shouldn't rely on a mortgage lender to determine how much home loan you can afford. Rather, crunch some numbers yourself, and see what sits right with you based on your income and non-housing related expenses.
Ramsey recommends that you take out a mortgage with a monthly payment of no more than 25% of your take-home pay. Other financial experts say your total predictable housing costs, including your property taxes and homeowners insurance premiums, should not exceed 30% of your take-home pay. You can use whichever formula you're comfortable with, or use your own. You may want to keep total housing costs to 20% of take-home pay, and that's fine, too.
3. Get pre-approved for a mortgage
Getting pre-approved for a mortgage won't guarantee you a loan. But it helps you embark on a more targeted home search, and Ramsey says it's a step worth taking.
When you get pre-approved, a lender digs into your finances and determines how much mortgage you can afford. That, in turn, helps you avoid looking at homes that are too expensive for your budget. Just as importantly, having mortgage pre-approval lets sellers know you're a serious buyer, and that could help you get an offer accepted in a competitive housing market.
4. Avoid adjustable-rate mortgages
When it comes to signing a mortgage, you have choices. You could get a fixed loan, which guarantees you the same interest rate and monthly payment for the duration of your repayment period. Or you could get an adjustable-rate mortgage (ARM), which usually rewards you with a lower initial rate.
The problem with ARMs, however, is that your lower interest rate is only guaranteed for a few years, and then your rate may climb. That's why Ramsey says adjustable-rate mortgages are a terrible way to go. It pays especially well to lock in a fixed loan when interest rates are low (which happens to be the case today).
Buying a home is a big endeavor, and it helps to go into the process armed with as much information as you can get. If you incorporate Ramsey's tips when embarking on your home search, you may find that heeding his advice saves you a lot of money.
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