Real Estate the Ramsey Way - How You Prepare to Buy a House

Episode Date: September 16, 2024

Your home should be a blessing, not a burden—but unfortunately, some people learn that the hard way. Get the answers you need with Real Estate The Ramsey Way, and learn what to avoid and how to do real estate the right way.   Next steps: 🏠Have questions about how real estate can help you reach your financial goals? Check out our Real Estate Home Base for free tools and resources to guide your next steps.   🏠And if you’re ready to buy or sell your home, connect with a RamseyTrusted® real estate agent. They’re experts who’ll help you confidently navigate homeownership the way we teach.     Listen to more from Ramsey Network 🎙️ The Ramsey Show   🧠 The Dr. John Delony Show 🍸 Smart Money Happy Hour 💡 The Rachel Cruze Show 💰 George Kamel 💼 The Ken Coleman Show 📈 EntreLeadership 💸 The Ramsey Show Highlights   Learn more about your ad choices.  https://www.megaphone.fm/adchoices Ramsey Solutions Privacy Policy

Dave Ramsey here and welcome to another episode of Real Estate, the Ramsey Way, where you'll learn how to make smart home decisions, avoid costly mistakes, and navigate home ownership with confidence. Helen is with us in Virginia Beach. Hey, Helen. What's up? Hey there. Thank you so much for taking my call. Sure. What's up? So my husband and I are looking into buying a house probably in the next four years. And we're starting to. to budget out for a down payment. And I'm a long-time listener, and I've heard you all talk on the show before about building your debt. And I was wondering if you guys could go into a little bit more detail about that as far as,

you know, your down payment plus your closing costs and your inspection and all of that. And see if you could give us kind of an estimate on how much we should be planning to set aside in addition to a down payment. Okay. Well, I mean, you're going to have a few things. things that you pay for in the closing costs and a good real estate agent can lay out what is normal and customary in your area. One thing you'll want to buy if the seller does not provide it and you don't negotiate it from the seller is a title insurance policy. Typically if you're getting a

mortgage company is going to make you buy one for them and you can buy a simultaneous issue for just a few dollars. But you need to find out what that's going to be in your situation. I assume you'll be getting a mortgage? More than likely, yes. Title insurance ensures that the title is clear, that there are no clouds on the title. Never buy a piece of real estate without title insurance. I've bought thousands of pieces of real estate. I've never bought one without title insurance.

Okay, and I've actually had a few claims, and I'm really glad I had it. Because sometimes people screw the title up and do it improperly, and then you've got a mess on your hands. it's tens of thousands of dollars. Doesn't happen very often, but when it does, it's a mess. So title insurance is one thing. Again, if you're getting it with your mortgage company, it's required because they want to have policy covering them.

You can get a simultaneous issue for a few hundred bucks that covers you as well. So that's one thing. The second thing is you're going to have prepaid, they're called. And you're aware in most house payments today, you have a house payment that is principal on interest to the bank, and they also collect approximately a 12th of taxes annually and a 12th of insurance annually so that they can build up the escrow account with those two things in it to pay the taxes out of that and pay the homeowners insurance out of that to ensure that the taxes are paid and the insurance is paid. That's why they do that. And to set that up

will usually be three or four months of each of those. So whatever your property tax is, Bill is four months of that and whatever your homeowner's insurance is four months of that to set up your prepaid's they're called. It's prepaying and setting up that escrow account to be able to do principal interest, taxes, and insurance P.I. Ti as you go along. Typically, there'll be a survey fee. Usually that's not super expensive. It's if it's in a neighborhood, $75 to $200 to $200. Typically, there's an appraisal, usually $500 to $1,000 somewhere in there depending on your area. And so you're going to have these miscellaneous things that fall into the heading of closing costs. And depending on your area and what your tax rates are and all those kinds of things, you're probably looking at about 3%.

Okay. Awesome. But again, what I would do, since you're such a planner and you're doing this well in advance, get in touch with one of the Ramsey trusted real estate agents in the area and have them give you an example of a house in the neighborhood you might be looking at. Okay, here's what a closing document might look like. a closing statement. And you can say, okay, there's those things Dave was talking about, line item down through there. And then you're going to be able to say, okay, on that house, a $300,000 house,

it was $3,000. Oh, okay, so it's $1,000. Oh, so now it's $6,000. Okay, it's 2%, right? That kind of stuff. That's what you'll be able to figure out. And it'd be fun for you as a first-time home buyer to see all the items that make up this vague category of closing costs, because they all actually do make sense. They're not rip-offs. They're all things that you do need. You do need a survey. You do need an appraisal. You do need title insurance. You do need to set up your escrow account. All those things are fine. There's nothing wrong with them. But when you add them all up, you kind of get a sticker shock moment. You go, they're ripping me off of these closing costs. And no, not really. You just got to know what they are. And so dig in there and figure out what they

are, and that'll help you get a good solid estimate because it does change from area to area, and a lot of it is based on the cost of insurance and the cost of taxes in your area. That'll throw this number a bit. Are you going to pay any points up front, which I wouldn't recommend? But are you paying an origination fee, which typically you are going to pay, which is a point, or a half a point, or something like that, to get into the loan. All of that's going to be figured in there, and again, a good real estate agent can help you map all that out, And also, Rachel, we've got a great website on our stuff at Ramsey Solutions.com slash real estate

that goes into a whole bunch of that stuff. It's a information hub. Yes. And there's just so many details. I mean, as you were even just talking, I was like, oh, my gosh. It's just so much. And that we have so many, so many blogs, articles, points of contact for people in your area to go and to get, yeah, to get this all. Because sometimes I feel like it takes a little bit to actually learn it.

So go to ramsysolutions.com slash real estate and go and read research. And again, you can find Ramsey Trust the Pros there on that website too if you want to call, just like you mentioned, to reach out to somebody. Yeah, and just, well, it's okay to nerd out on it. One of the things when you're doing something the first time is it's always scary because of the unknown. Yep. And so the more you know, the less fear there is. Nick is with us in Knoxville.

Hi, Nick. How are you? Hey, good. How are you, Dave? Better than I deserve. What's up? Well, I'm wondering if it was the right time to purchase a home. I am on Baby Step 4, currently debt-free after being in almost $50,000 a debt. So on the right track there, but I'm not sure if it was the right decision to purchase the home right now.

Right time in what regard, in the economy or in your life? In my life. And was it or is it? I mean, did you already purchase it? I did purchase it, yeah. You did, okay. You're in Baby Step 4. So you're debt-free and you have your emergency fund in place.

That is the time we would tell you to do it in terms of baby stuff. Was it too much house, Nick? Was it too much? Are you stressed about the payment? Is that why you're calling? Or you're just curious? I'm kind of wondering if it's the amount that I owe and it freaks me out a little bit. I've never been in this much of debt.

The mortgage is $236,000. I make about $90 a year. I'm a base salary and commission. So that's roughly what I'll make this year. I sold some land worth about $120,000 so I could use that as a down payment. So your mortgage is $2.30 or your purchase price was $2.30? Mortgage is $2.30. I put down $60. What did you do with the rest of it?

I haven't saved away right now. I'll have to pay taxes on some of it because it was inheritance. Okay. And you have to have an emergency fund? Correct. Okay. And that used up the other 60. Correct. I got you. Okay. Okay. That makes sense. How old are you? I'm 24. Okay. Wow. I don't hear a single thing in this that sounds bad. How much is your payments compared to your income?

My payment is going to be 1660. I'm just wondering, I took out a 30 year. I know you guys recommend a 15 year, but I was... Yeah, I would pay it off then as soon as you can pay it off. I wouldn't refinance it just to do that. but you're just, you're 24, it's the first time you've done this to the first time you do anything of scale or size. You feel the weight of it. That's normal. You should. That means you're wise. If you didn't feel a little bit of pinch when you do something, the first time you pick up 300 pounds, you would feel it, right?

231 pounds, right? And you, you know, and so that just means you're wise. you're, but the numbers that you're giving us are all fine and the order that you did everything are fine. We would have done a 15, you're right, but I would just challenge you to get to paying on it. Let's pay it off in seven or eight years. You can probably do that because you're that guy. Yes, sir. I'm also wondering, at least for a year, I'm going to have a friend rent off of me who's looking for a spot. So I think that'll help out with the mortgage. But I wasn't sure if that would be a good plan also moving forward to help pay it off faster.

Yeah, I mean, if you're single. Anything you could tolerate. You want to, yeah. You're okay, though. What is it? I'm still not, if you called us and asked, should you do this, everything you said follows the guidelines and we would have said, Nick, by the house,

only we would have put you on a 15. But other than that, everything else lines up. I don't hear anything here to be concerned about. Is there something I'm missing? No, I'm just making sure that that follows. Yeah, no, it's great. And, Nick, and honestly, because, we tell people if they're in a position, go ahead and get in because housing pricing, house prices

continue to go up. We have no clue what's going to happen with interest rates and everything. But like it's to the point that if you have the money and you're able to buy, go ahead and get in. Now. Because it's going to be more expensive next year and the next year and the next year. And there's not a bubble. There's not a crash coming. I mean, none of that's happening. So if you have the ability to get in, go ahead because it's terrible.

I mean, like just, I mean, we were looking at numbers last week and just, you know, I mean, from, you know, salary, you know, for your generation, Gen Z, this is the toughest time home buying has been in 50 or 60 years. I mean, it's tough right now. It's not going to be forever, but right this second is tough. You pulled it off. Salaries and income is not kept up with it. So it is. If you want to know more about this, folks, you can go to ramsysolutions.com slash real estate or if you need to get a good agent in your corner, go to ramsysolutions.com slash agent to help you buy.

and they'll, if they're Ramsey trusted, they'll make sure you're doing it the way we teach. They're not going to assist you in doing something stupid if they're Ramsey trusted agents. So go to Ramsey Solutions.com slash agent. You did good, Nick.