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This Is the Most You Should Borrow When Buying a House
Dave Ramsey, well-known radio talk show host and founder of Ramsey Solutions, is offering some advice on homeownership.
For those who don’t know, Ramsey has been warning his followers for decades not to get into debt. He’s a staunch advocate for using cash only for purchases and being incredibly mindful of buying only what you can afford.
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He does make a slight exception for buying a house, however, and this is most likely because, if you can keep the mortgage payment low enough, it’s worth taking on this debt because it does become an investment. Plus, you’d be paying that money toward rent if it wasn’t going toward a mortgage, so you’re not spending money you could be saving anyway.
To that end, here’s how Ramsey explains his philosophy when it comes to buying a house:
The most important note Ramsey wants to make sure we understand is that he’d prefer we don’t borrow at all.
Most of Ramsey’s followers will understand that he grew up blue-collar and built a wealth portfolio of up to $4 million by the time he was 26 through traditional means of buying real estate and investing. Sadly, however, this traditional method involves a lot of borrowing, which resulted in Ramsey becoming overleveraged and unable to pay his loans to the banks.
In 1986, he filed for bankruptcy, and he has been advising people on how to avoid this kind of financial disaster ever since. The foundation of his teaching is to stay out of debt.
Yes, even when it comes to buying a home. Why?
Because when push comes to shove, if you have debts you cannot pay off, you may end up broke and in financial ruin, just like Dave.
In an ideal world, you would save up enough money to buy a home outright. But very few of us live in that ideal world, especially as housing prices continue to climb.
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So, as Ramsey said, if you must borrow, and most of us must, your goal should be to keep the mortgage below one-fourth of your take-home pay. That means if you bring home $4,000 each month, your mortgage should be no higher than $1,000.
It may sound crazy to some, but this approach ensures you’ll still have plenty of money to save for emergencies, spend on household needs like groceries, gas and basic necessities, and invest.
In order to get your mortgage this low, you’ll need to think outside of the box. The average monthly mortgage payment in the United States is around $2,200, which means you’ll need to bring home at least $8,800.
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