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One of the first things new home buyers ask is how much house can I afford? While there are several rules of thumb, today’s post is going to be Dave Ramsey style. You’ll find that this amount is much less than what you’ll qualify for with a lender. We’ll answer questions like “how much of my monthly income should I spend on a mortgage?”
Dave Ramsey House buying
OK, let me start off by saying that you’ll probably get a little uncomfortable reading these Dave Ramsey suggestions. But, with growth comes discomfort, because you’re stretching yourself and doing something new. But I ask that you keep an open mind, this is good stuff.
- Don’t buy a home if you still have debt – Yep, he said it. If you still have student loans, you should pay them off first. If you have a car note, either pay it off or sell the car and buy one in cash. The same thing for credit cards, 401k loans, personal loans, you name it. If you own a home, the only debt that’s acceptable under the Dave Ramsey plan is a home mortgage. Oh, and there’s stipulations to that. Keep reading.
- Don’t pay more than 25% of your take-home income – here’s the first caveat to a home loan. It shouldn’t be more than 25% of your take home pay. After your federal and state tax deductions. After your medical, dental, vision deductions. And after your 401k and life insurance deductions. What actually gets direct deposited into your checking account? THAT is the number that matters here.
- Put at least 10% down – if I remember correctly, Dave says he’s OK with first time homeowners getting a loan where they put 10% down. But if this isn’t your first rodeo, you should take some of your current homes equity and put at least 20% down. If you really wanna be baller then go for 100% down. Yep, as Dave says on his podcast “the paid off home mortgage is taking the place of the BMW as the status symbol of choice”.
- Get a 15-year, fixed rate loan– and you can’t forget this requirement. With the 25% take home, your loan should not be longer than 15 years. Yes, this means that you’ll “qualify” for less house because you won’t get a 30 (or 40) year loan. But Dave wants you to “live like no one else so later you can LIVE like no one else”.
Want to make sure you don’t buy a home that leaves you house poor? Use this How Much Can I Afford Worksheet to help you clearly lay out the maximum payment for your income and how much you should spend in each budget category – Dave Ramsey style!
Why this rule of thumb for how much house I can afford
Why would Dave be so harsh? Ultimately Dave’s goal is for you is financial freedom. But before you get there, I’ve listed several other reasons why his tips are so important. Here’s why:
- Vacations – girls just wanna have fun, right? I know I do. You gotta have some fun in between all the work. But you really can’t have fun if all your money is going towards your house.
- Your neighbors – I heard this somewhere…it was probably on an episode of the Dave Ramsey Show…but I thought it was pure wisdom. Here is goes: it’s human nature to begin to think and act like the people you spend the most time around. In fact, you’ll find yourself doing similar things as your neighbors. Did the neighbor beside you get a fence? I’d bet you’re soon to follow. Did one of your neighbors enlarge their deck? Yep, one of your other neighbors do have that soon. It’s just human nature (and social psychology). But if you’re broke, you’re just going to go more into debt until you’re overwhelmed. Either that or you’ll be sitting on the sideline watching. I’m not saying that you should save money, so you can copy what others are doing. I’m saying you’re going to want choices.
- Furniture – I don’t care if you already have a house full of furniture and another storage unit full. You’re going to want to buy more for your new home. Or, you’re going to want to replace what you have. Since every home has a different “feel”, you’ll most likely want to get rid of some of your old furniture. #JustBeingHonest. And you can’t replace your furniture if you don’t have margin built into your budget.
- “Homeownership when you’re broke is never a good idea….Everything that can go wrong will go wrong. That’s Murphy’s Law, and he’ll move into your spare bedroom along with his three cousins — Broke, Desperate and Stupid.” ~ Dave Ramsey
- Hobbies – so what’s your “thing”? Are you a classic car enthusiast? Do you want to travel the world? How about have season tickets to your favorite sports team? Do you want to do something more altruistic and help your local charities every month? Not putting all of your money towards the place you lay your head will help you live the live you really want to live.
- Being house poor – this literally sucks. Have you ever been in the situation where all you can do is go to work and go home? If you’ve never been there, count your lucky stars. If you’re like me, and you’ve been there, you KNOW it sucked. Why set yourself up to be in the situation again? I’m begging you, please don’t. It’s like inviting murphy’s law in for tea and crumpets.
- Murphy’s law – what’s murphy’s law? I’m glad you asked. The technical definition is “anything that can go wrong, will go wrong”. But the keep it real version is something like this. The glass door on your oven cracks and you can’t cook until it’s fixed. Or your ceiling is dripping water because your HVAC is leaking. Let’s face it, stuff happens. And for whatever reason, bad is attracted to broke. So, the more broke you are, the more likely you are to attract murphy’s law. Wanna fix it? Have some money in savings and don’t’ be house poor. That way, these emergencies get downgraded to just inconveniences.
- Money is the most powerful wealth building tool – if it’s all tied up in your home, not only do you lose out on experiencing some of the cool things in life, you put your future at risk.
"How Much Home Can I Afford?" Worksheet
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How much house can I afford? Dave Ramsey Style
We just went over Dave Ramsey’s suggestions around how much house you can afford. Then I broke it all down to explain why you should really listen to his approach. As we wrap things up, your next step is to download our FREE guides. The How Much Home Can I Afford Worksheet and the Home Buying Worksheet. Both will help you as you prepare for your next home purchase.