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Dave Ramsey is spot on with this important warning.
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Buying a house is something many people look forward to. But, while this purchase can be one of the best of your life, it can also be one of the worst if you jump into property ownership before you are financially ready to take on a mortgage loan and the other costs of homeownership.
Dave Ramsey has warned that there is one situation where you should absolutely never buy a house, and on this issue, the finance guru is spot on. Here’s Ramsey’s warning as well as some additional details on why his advice is something everyone should listen to.
Don’t buy a house in these circumstances
According to Ramsey, you absolutely should not buy a property if you don’t have some cash to invest in the transaction.
“You should never buy a house with no money down. That’s it,” Ramsey said. He explained that if you are unable to come up with cash for a down payment, this is a clear red flag that suggests you are not yet in a good place to take on all of the big expenditures that come along with owning your own place.
“There are other costs involved with homeownership (HOA fees, emergency repairs, homeowners insurance premiums, etc.) that may end up putting you in a bad spot financially,” Ramsey explained. “If you can’t cover a down payment, you won’t be able to handle those costs, either.”
Why Ramsey is right
Ramsey is absolutely spot on when he says you don’t want to move forward with buying a house unless you have savings. If you have a hard time coming up with money to put down, you may indeed become easily overwhelmed with all of the new things you have to pay for.
That’s not the only reason why buying a house without a down payment can be such a big disaster. There are plenty of other problems as well.
You’ll have limited — and likely costly — loan options. As Ramsey points out, most lenders require some money down. If you find a lender offering a $0 down payment loan, chances are it will come with higher fees, a higher interest rate, or other unfavorable terms.You’ll end up trapped in your house. In a best case scenario, property values will rise. But, even if that happens, if you have no money down, you won’t be able to sell your house for enough cash to pay off the loan and cover all the fees (like real estate commissions). You’d need to see your property go up substantially in value or pay your loan for a long time before you could break even on a sale. And if property values go down, you’d be in worse shape.You’ll likely have to pay for mortgage insurance. If you have less than 20% down, you have to pay for mortgage insurance to protect your lender in most circumstances.
Ramsey said you should make sure to have a minimum of around 5% down and ideally more. For most people, it’s best not to move forward without at least a 10% down payment in order to make sure you have enough equity that you aren’t trapped in the home.
It may seem like a pain to save up all this cash, but if you don’t do it, you could really end up regretting it after moving in.
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