I don’t own a home. It’s not entirely Dave Ramsey’s fault, but following his philosophy sure didn’t help.
In 2017 my wife, Heather, and I set out to buy a home and upon meeting with Greg at Stewardship, we learned that our debt free lifestyle was about to receive its first very frustrating counter argument.
My wife and I fully bought into the baby steps and Dave’s anti-debt philosophy. Thanks to his debt snowball method, we were able to pay off our student loans in December 2015 and were officially debt free! For a real Ramsey fanboy, this sounds like a dream. Fast forward to 2017, we had nearly $20K saved up and knew we were on a good path to buy soon.
When you decide to buy a home, the wise approach is to meet with a home loan advisor first to determine how your finances will look and to get pre-qualified. This gives you and your real estate agent a very clear picture of what kind of house to look for. Part of the prequalification process includes the advisor pulling a credit report. It was at this point we learned that carrying no debt whatsoever for over a year can have a particular impact on your credit score. It makes it go away–down to zero.
Not having a credit score makes obtaining a mortgage more difficult–leading to worse loan programs and higher interest rates, not to mention limiting my lender options to ONLY lenders who offer manual underwriting.
No credit score was a real wrench in our gears.
Sitting on Greg’s couch, we were faced with a harsh reality. What I didn’t know was that buying a home requires far more than just a down payment. There are closing costs, escrow fees, upfront homeowner’s insurance, and taxes. You typically want to set aside $8-10K for all of these costs. On top of that, you don’t want to use your entire cash reserves when buying a home. It is prudent to keep cash on hand to cover any unexpected expenses. So realistically, we went from $20K for a down payment to about $6K.
Greg informed us that $6,000 would still be enough for a first-time homebuyer on a $175-180,000 home! But not without a credit score. Something I have learned is that there is a gap between Dave Ramsey’s advice and reality.
When it comes to buying a house, a Dave approved mortgage is a 15-year fixed rate with 20% down to avoid the “sinful” PMI (Private Mortgage Insurance). But he doesn’t talk much about the other costs that go along with it. Let’s run some rough numbers from 2017.
We were looking in the neighborhood of $180,000 and 20% of that is $36,000, then add on the $10,000 in costs (to be conservative) and the three to six months of suggested emergency savings which, depending on your situation, can approach $15,000. In 2017, to buy a house, assuming we had credit scores at the time, we would have needed $61,000. We would have needed to save $1,700 a month for three years to get to Dave’s 20% rule. But that doesn’t leave wiggle room for any unexpected repairs or for life to happen.
Besides, look at what has happened to home costs. Today, a home for us will cost north of $400,000. Now 20% is $80,000, plus emergency funds puts us at $105,000 just to consider buying a house under Dave’s restrictions.
The fact of the matter is, 20% is not realistic in 2022 for a first-time home buyer.
Dave’s advice should NOT have been the only advice I was hearing. Being harshly against credit cards makes a lot of sense if overspending is an issue. But we weren’t up to our ears in crippling debt. Our behaviors were not out of control. It was like we were treating a paper cut with a full-body cast.
Attacking our debt at the beginning of marriage was incredibly valuable for both of us. We have built a solid foundation of wise financial behaviors. However, if I could climb into a DeLorean and go back to 2015, I would change one thing: I would have us keep our credit cards open to make sure we maintain a credit score.
Working the baby steps to a T is ideal for people who have been out of control and need a place to start. The 20% down rule works for those who already own a home. I propose an adapted set of baby steps for people who are just getting started in life:
- Step 1: Save up $1,000 as fast as possible to cover basic emergencies. Get on a budget. Don’t spend more than you make.
- Step 2: Pay off debt as quickly as you can, but don’t close all your accounts. Change credit card behavior. Use it like cash, only spending money that you currently have in your checking account. Still be very intentional with your spending.
- Step 3: Start your habit of saving. Every time money comes into your account, put some in savings. Build your account to cover 3-6 months of expenses. Open a non-qualified investment account (here’s how). If you are saving for a house, meet with a home loan advisor first and determine what kind of down payment goal you need for your situation, but a good rule of thumb is 3.5 -5% down, plus that conservative $8-10K.
Personal finances are personal. Everyone’s situation has unique challenges and aspects that need to be dealt with individually.
Don’t stop listening to Dave Ramsey , but his advice should not be the only advice you take in. And neither is ours. Proverbs 15:22 says, “Without counsel plans fail, but with many advisers they succeed.”
I don’t blame Dave, but I am no longer a fanboy and I am much happier for it. Even if I don’t own a home.
Grant and I made a video about this topic if you want to see me tell the story.