I saw Dave Ramsey on TV the other day talking about steps to take before buying a house. Knowing that Dave can be pretty extreme sometimes, I was interested to hear what he had to say. Most of his advice is straightforward motivating, especially his advice about getting out of debt. But I don’t agree with everything he says, which is why I sat eagerly listening to hear what his five-point checklist was for buying a home. 1. Pay off all debts If you’re not familiar with the debt snowball , you definitely should be! Dave suggests paying down the smallest debts first then applying all the extra money you have to the next largest debt, and so on. It’s an awesome way to pay down debt and keep motivated while doing it. Dave recommended paying down all debt, not just consumer debt like credit cards and auto loans, but also student loan debt. This is where many young adults would disagree with Dave. Personally, I think that with the right situation, it might make sense to take out a mortgage even if you have student debt, but you should be very careful about how much debt is in your name. I would love to hear your thoughts on this point! Leave a comment below! 2. Have a 3 to 6 month emergency fund I couldn’t agree more with Dave about this one. Owning a home means that you are responsible for the repairs and everything else that might happen. A new furnace could easily wipe away a whole month’s of income, so you need to build an emergency fund before signing the dotted line on your new home. 3. Save 20% for the down payment Twenty percent! That’s a lot, isn’t it? If you’re thinking about a home with a price tag of $130,000, that means Dave recommends you put down $26,000. The reason Dave recommends this is to avoid PMI, or private mortgage insurance. For every $100,000 borrowed, your PMI payment is about $75, which is money Dave doesn’t want you to ‘throw away.’ While I agree that people don’t need to get in over their head with a mortgage, the idea of putting a large chunk of my assets in a home is a little unsettling. This is especially true after what we just lived through with the housing bubble. 4. Get a 15 year fixed rate mortgage In the grand scheme of things, a 15-year mortgage will end up costing you significantly less in interest than a 30-year mortgage. A 15-year mortgage might be a couple hundred dollars more each month and throwing an extra payment on it each year can reduce your term by two years. If you plan on living in your home for a long time, then a 15-year mortgage is something that you should definitely consider. For a growing family that needs room and may move in a few years, a 30-year mortgage might help them with their cash flow. The answer isn’t black and white for everyone, so be careful not to jump into either option without careful thought. With rates as low as they are today, it seems foolish not to lock into it. Be careful not to go for an adjustable rate mortgage that has an attractive interest rate on it now. You never know when interest rates will go back up! 5. Don’t exceed 25% of income on payments Before you commit to a mortgage, make sure the payments are no larger than 25% of your income. Should you calculate this based on gross or net income? To be safe, I’d suggest net income. If we learned anything from the last few years it’s that you never know if or when you’ll lose your job and lose your home. Having a mortgage that puts you on the verge of broke each month isn’t a good idea at all. It doesn’t matter if you’re middle class or a high-income family, the ‘too much house’ syndrome can happen to anyone. What do you think of these suggestions? Meet us in the comments! Photo by james.thompson Related Articles: Which Debt Should I Pay Off First: Car or Student Loan? 5 Questions to Ask When Deciding To Refinance Your Home Loan How to Pay Off Your Mortgage Early Tips for your mortgage refinance 6 steps to reducing your credit card interest rates 5 things home buyers should be doing in this market Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook . The articles on this site are for entertainment purposes and should not be taken as financial advice. Please contact a financial professional for specific advice regarding your situation. Also, many of the CPF articles help us pay the bills by using affiliate relationships with Amazon, Google, eBay and others. Find out more here .
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5 Things To Do Before Buying A House