Dave Ramsey Is Costing First Time Home Buyer's Thousands! Beware When Drinking The Dave Ramsey Koolaid!
OK, before you jump on me, know that I am a big fan of Dave Ramsey. I recommend The Total Money Makeover to many of my clients. It is great information on budgeting and debt re-payment. He is a no-nonsense-stop-spending-beyond-your-means kind of guy.
From Dave’s Website:
Dave Ramsey, who’s shown more than one million families how to live debt-free and build wealth, recommends the “100% Down Plan” for buying real estate—pay cash for the whole house! If that seems too far out of reach for you, then at least hold off on your real estate purchase until you meet these three conditions:
- You are debt-free and have an emergency fund of 3–6 months of expenses.
- You have saved at least a 10% down payment. A 20% down payment is preferable to avoid Private Mortgage Insurance (PMI) payments.
- If you’re married, you’ve been married at least one year. Don’t add the stress of a home purchase to a brand-new marriage, and never buy real estate with anyone you are not married to!
If you aren’t paying cash, get a fixed-rate mortgage for 15 years or less. Keep your payments low—no more than 25% of your take-home pay. Lenders will tell you that you qualify for more, but stay conservative.
Dave’s plan is a good one. He advocated folks paying down debt and living on cashI am saying just be careful when drinking the Dave Ramsey Koolaid if you want to buy a home and you aren’t planning on paying cash. The philosophy is great, until you want to get a mortgage.
It sure seems like it would make you a great risk if you:
· are not buying beyond your means.
· Don’t have any credit card, vehicle debt , or student loans that would get in the way of paying your mortgage.
· Have an excellent rental history
· Have excellent non-traditional credit history
Heck, if it was my money, you couldn’t be a better risk.
Unfortunately, in this lending environment, for the people who actually have money to lend, they look to your FICO score to determine the level of risk. Paying your rent and other household bills that don’t report to the credit bureaus and therefore don’t make the for-profit (not government agencies, not non-profit) Experian, Equifax and Transunion, doesn’t help you to show you are a good credit risk.
What will not having a credit score cost you when applying for a mortgage?
Conventional financing is probably not available to you. Many lenders won’t even talk to someone without a credit score.
FHA financing may be your only option with a lender who is willing to lend to someone with no score. You will be required to put at least 10% down (instead of the minimum 3.5% required by FHA)
An FHA loan requires 1% Up Front Mortgage Insurance that is typically financed into the loan. (On a $200,000 loan, that’s $2000)
Then if you are getting a 30 year mortgage, you will have mortgage insurance of 1.15% added to your monthly payment.
On a 15 year mortgage the monthly mortgage insurance is a minimum of .25% until your loan reaches 78% of the appraised value of the property.
There is also a pricing hit of 2% for having no score which can increase your interest rate by anywhere from .25% to .75%. This means your payment on that $200,000 could increase by up to $75/month.
There are many ways to use credit responsibly. Unfortunately your credit score is used these days for insurance rates, vetting job applicants, even health insurance. Not having a credit score can be costly. Paying off debt is a great idea, credit card debt is expensive. Not living beyond your means, excellent advice!
One of my clients actually considers his credit cards an income source. They use cards that pay them cash back on purchases. They use the card and pay it off before incurring any interest, earning cash back on every purchase.
Beware of living off the grid credit-wise, until you can pay cash for a home, or have already gotten the best mortgage available and don’t plan on refinancing, or if you are interested in purchasing a home using a traditional mortgage.
Dave Ramsey Is Costing First Time Home Buyer's Thousands! Beware When Drinking The Dave Ramsey Koolaid if you want to buy a home with a mortgage!
If you are considering purchasing a home in Maryland and want to be sure you are mortgage ready, my brother Tony and I will be happy to help! We help to make the mortgage process a pleasure!
If you already own your home, we are happy to provide a no-cost mortgage review to help you to determine if refinancing may be in your best interest. Please contact me at 410-960-2061.