I had often said that while I got started in my personal finance journey by listening to Dave Ramsey, however, have also expressed that I don’t follow any one expert or pundit, influencer, or journalist religiously. By listening to many different people or organizations and form my own methodology about earning, saving, spending and investing money. I had recently posted an article about how hard it can be for young adults to purchase a home. In writing this, I recalled some of the criteria Dave Ramsey, and Ramsey Solutions often advise to people when purchasing a home. I pulled that out for a separate post. Let’s go through some of the challenges of Dave Ramsey’s home buying criteria, in my opinion.
In the current world where financial independence and homeownership can be goals for many young adults, the advice of financial gurus like Dave Ramsey often serves as a beacon, with millions of followers and listeners. Ramsey’s criteria for purchasing a home—putting down at least 20% as a down payment, opting for a 15-year fixed-rate mortgage, and ensuring that monthly payments do not exceed 25% of one’s take home pay, aim to promote financial stability and prevent individuals from becoming “house poor.” However, while these guidelines offer a conservative route to homeownership, sticking to them in the current economic climate offers its own set of challenges for young people.
High Down Payment Requirements
Don’t get me wrong, I like the idea of dropping a higher down payment on a home if you are able, but one of the most significant barriers to homeownership is the 20% down payment requirement often advised by Ramsey. For instance, here in Minnesota the typical home price is around $317,000. Ummmm, that would mean the down payment would be over $60,000! I understand this may not be the price of a starter home, but it’s close! In today’s market, where property prices are soaring, saving such a substantial amount is daunting for many young adults, especially those grappling with stagnant wages, the rising cost of living, and student debt. This requirement can prolong the saving phase, delaying homeownership.
The 15-Year Fixed-Rate Mortgage Dilemma
Choosing a 15-year fixed-rate mortgage, as advised by Ramsey, results in higher monthly payments compared to a 30-year mortgage. While this strategy aims to reduce the amount paid in interest and expedite equity building, it significantly limits affordability for young buyers. In a time where financial flexibility is crucial, the higher monthly commitment can deter many from pursuing homeownership, pushing them to continue renting despite the desire to own. Let’s use the example above. Based on a $317,000 home, and let’s assume the buyer qualified for an interest rate of around 4%. After the down payment, the loan amount would be around $250,000. Now take a look at the difference in payments:
For 15-year mortgage, the monthly payment would be around $1,800.
For 30-year mortgage, the monthly payment would be around $1,200.
Monthly Payment Limitations
Limiting the monthly mortgage payment to no more than 25% of take-home pay is Ramsey’s advice for maintaining a balanced budget. I do understand the reasoning here. However, with escalating home prices and the economic pressures we mentioned before, finding a home that fits this criteria is increasingly difficult. This guideline can severely restrict the housing options available to young buyers, particularly in high-demand urban areas where property values exceed national averages. Then, when you also review what this would mean in terms of how much you’d need to earn, it is out of reach of so many early grads, young adults, or those purchasing their first home. Check it out. Again, based on the previous payment of $1800 per month, it would mean the monthly take home pay would need to be around $7,200! That’s around $86,000 per year! This is crazy to be expected as an early salary. Now this does become more achievable if you have a partner and are working together. But that discussion of joining finances, and marriage is a discussion for another time.
The Need for Adaptability and Support
I do feel that strictly adhering to Ramsey’s criteria can work and set people up for success. However, may not align with the realities faced by many young adults in the current housing market. Flexibility in approach and considering alternative strategies—such as opting for a longer mortgage term for lower monthly payments, or exploring various down payment assistance programs—can make homeownership more attainable.
I do feel that enhancing financial literacy to better navigate these challenges is important. Understanding all available options, from government-backed loans that allow for lower down payments to first-time homebuyer incentives, can help young homebuyers with the knowledge to make informed decisions.
Flexibility and Responsibility Is The Key To Homeownership
While Dave Ramsey’s homeownership advice is rooted in ensuring long-term financial health. Tthe practicality of applying these criteria can be daunting for many young adults. By recognizing the need for a balanced and adaptable approach to homeownership is essential in navigating the complexities of today’s real estate market.
Empowering themselves with financial knowledge and exploring all avenues for homeownership, young people can find ways that align with their financial reality, goals, and homeownership aspirations, even in a challenging economic environment. Thanks and remember, keep those horns up my friends! \m/\m/
Leave a Reply