Real Estate the Ramsey Way - So You’re Ready to Buy a Home (Now What?)

Episode Date: October 16, 2023

Buying a house could be the biggest purchase of your life. We teach that you should put at least 20% down on a 15-year loan. And the more money you put toward your down payment, the less money you have to spend on interest every month. In this episode, you’ll learn the best way to save for a house to set yourself up to win with money now and in the future. Helpful Resources:   Learn about the best way to save for a house with our Step-by-Step Guide to Saving for a Down Payment. Find the only real estate agents in your area endorsed by Dave Ramsey.

Dave Ramsey here and welcome to real estate, the Ramsey Way. It's no secret that getting ready to buy a home takes some hard work. And one of the hardest parts that always comes with a lot of questions is saving for a down payment. I mean, that's a lot of money. But when you set clear goals and you save up the right amount and make a plan, the home buying process will go a whole lot smoother for you. So check out these questions from homebuyers all about what to do next once you're ready to buy a home. Matt is in Pittsburgh.

Hey, Matt, welcome to the Ramsey Show. Hey, Dave. It's an honor to be speaking with you today. You too. What's up? Well, I'm currently a 22-year-old college student. I'll be graduating here in the next couple months, and I'm looking to get out of my renting situation

and purchase a home within the next year. I'm kind of lost on how to really save up for it. If I should be keeping all my income that I'm going to be having in cash, or if I should be investing it and how much you recommend to put down on my first home purchase. I'm just kind of looking for some guidance here. Cool. So what's your income, Matt? Well, currently I don't have any, but I'll be starting a job in June that I'll be making $70,000 in my first year plus $10K in stock.

But I'm pretty sure I don't get paid that until like a year, year and a half. Okay. And do you have any debt right now? I have a good amount of savings and personal investments, but I do have $9,000 left on a car payment. Okay, and that's all the debt. That's all the debt. So what's stopping you from paying off the car today and freeing up that payment? Well, I was fortunate enough not to have to pay for my college because I got an athletic scholarship.

So because of that, my dad, we bought a car together. Well, it's in my name, but we bought it together during COVID, so there's no interest on it. It was like one of those deals. I know you probably won't like hearing that, but I don't know. I just haven't put it as a first priority just because I don't really want to use my. I have about like $11,000 in savings right now, and I kind of don't have an income in the next couple months, so I've just been avoiding it, I guess. How much have you gotten personal investments? Around 17.

Okay. Is that in a retirement account? No, it's actually individual stocks, and yeah, basically all stocks and a little bit of cryptocurrency. Okay. Well, Matt, I'll tell you what we teach, and this is the process I followed, to get through all the baby steps and now with a paid-for house. Baby step one is the $1,000 emergency fund. Baby step two, we pay off all of our debt using the debt snowball method, and that includes the car. Baby step three, we get three to six months of expenses in an emergency fund, and then Baby Step three,

we start saving up for the house. And so that's where that would fall in. And so you're not quite there yet. You could be if we released these investments cashed out and started doing things a different way. But it sounds like you're good with Matt's plan, which is fine. But if you're going to buy a house, here's our parameters for it in that 3B. I want you to save up 10 to 20% for your down payment on a 15-year fixed mortgage. That should be your only option when it comes to mortgages.

And your payment on that should be no more than a quarter of your take-home pay. So you can jump on to our mortgage calculator at Ramsey Solutions.com and start playing around with those numbers to see, hey, in the Pittsburgh area for a reasonable house for my first house, what do I need to do? Okay, I need to save up $70,000 in order to get this house on a 15-year fixed rate where the payments no more than a quarter of my take on pay. Gotcha. So once I pay off the car, sorry, what was that? Go ahead, go ahead. So once I pay up the car and save enough to put 20% down, and my take-on pay, my monthly payment's a quarter of my take-um-pay, and I'm good to go.

On a 15-year. Yeah, and you could, I mean, today, if you paid off the car, you'd still have money left over for your emergency fund, and then you can start to save up for this down payment. We just got to start doing things in the right order so that you feel this progress. Gotcha. So here's the thing. You've listened to this show, I can tell, by the way you're responding to some of these things, and you kind of knew what we were going to say, didn't you?

yeah a little bit all right and so here's the data the actual facts not theory not a ramsi opinion but the actual facts we did the largest study of millionaires ever done in north america 10,167 of them the number of them that became millionaires using bitcoin was precisely zero the number of them that used single stocks playing a day trader game was under 5%. In other words, 95% of them did not use your plan. Right. So you need to decide if your plan sucks as bad as I think it does. Well, would you recommend cashing out of my individual stocks in crypto and keeping that?

Apparently, that's what I just told you. So don't invest that in anything else. Keep it sitting in cash. You need an emergency fund of three to six months of expenses, and you need to be debt-free paying off that stupid car by the end of the day. And then you start building in cash your down payment on your house. And then when you get your house, you start putting 15% of your income away into good growth-stock mutual funds in your 401.

at your new great job. And you're going to be a millionaire doing that by the time you're 35. He says, I'm 45 years old. I'm married with two children under 12 and completely debt-free. I took a new job a year and a half ago making 100K a year, and my wife is a stay-at-home mom.

The nature of my job requires me to be on-call and close to work, leaving me little choice but to pay a premium rent of $2,000 per month. We are currently watching the housing market and still learning the area, and are socking money away to buy a home. I have $45,000 in the bank doing nothing for me,

but I've been hesitant to invest, as we would like to have the money available, should a home come up that we can buy. I've been told that cash in a savings account is like melting ice. What do I do with it? Hmm. Well, in this situation, you know, when it comes to saving for a house,

it's a little bit different than just, you know, any other money that you're putting aside. you know, typically we wouldn't invest the money that you're saving for a house unless you know the timeline is, you know, five years or more. Although, Dave, I've heard you say that a lot of times you'll just pop some money in an index fund and let it sit there and grow if you, you know, know what you might use it for. I particularly don't have the stomach for that. I'd probably put it in the HYSA and just get the best return on it that I possibly could

for the time being because it sounds like you're kind of in that moment where if the right thing comes open, you're ready to jump on it. So yeah, I would keep it out of the market and I would put it in a high-yield savings account, maybe put it, you know, I've heard Dave say that he'll put it in a CD, that sort of thing. Yeah, high-yield savings account, like you said, it's perfect. It's not melting ice when you are getting ready to use the money and you're getting ready to use this money. And so if you were going to leave it in a stupid savings account for 10 years, then yeah, it is melting ice. Yeah. But that's not your description. You're in the housing market. You're ready to buy and get rid of this premium rent and everything else.

So, yeah, you definitely go that route. You're not doing the wrong thing. Now, Jade, I did have a young guy come in. All the work I've done over the years with different NFL and other professional athletes, they just happen to be listening to the show and say, hey, would you look at my stuff? Yeah, I look at your stuff. So it's always interesting stories. And, of course, we've run into all the negative stories where they've burned through all the money.

You know, I made $100 million. I've got nothing to show for it or whatever, that kind of stuff. I've met those guys, and there's always a lot of shame and stuff on those guys. But in the light of what Ryan is saying, this guy comes in. He's young. I mean, he's like 28 years old, maybe, 26 years old. He'd been in the league a few years, but not, you know, he wasn't an old guy in the league by any stretch. And his sweet little wife, and they drive in in a used van.

Wow. And they come in and they go, like, Dave, you're going to kill. kill this we've missed up and I'm thinking they're going to tell me they've blown all their money and he's I I you're just going to be so mad at me and I'm like number one I'm not going to be mad at you regardless how dumb you are but what did you do I mean did you do something dumb and he goes yeah we've got all our money in savings account and I said uh how much money do you have in savings account uh 36 million oh whoa and I'm like no I am not going to yell at you I'm going to hug you because you did everything right but one tiny thing.

You actually, you're a pro athlete who has money. You know what this is? A unicorn. I mean, you're incredible. Way to go. You're amazing. I'm so proud of you. You actually lived on less than you make.

You're driving a used car. You're not trying to impress your posse. You know, you're out, you didn't buy your mother a house. You couldn't afford to buy her. All the stupid butt stuff I usually run into, you have $36 million. And the only thing you did wrong was you didn't invest it. No, you get a hug. You don't get a yelling.

You know. But yeah, in his case, he is melting ice for sure. He does need to get that money invested. So he was wrong. But not on the yell at wrong side, though. The smart side. Way to go, man. I mean, absolute stud.

Believe it or not, saving for a home isn't impossible, especially when you have a plan. Check out our free guide and learn how to break down your savings goal into simple steps so you can buy a home with confidence. find our free saving for a down payment guide at ramsysolutions.com slash downpayment or click the link in the show notes. Jacob is with us in Seattle. Hi, Jacob. How are you? I'm doing well, Dave. Penn, thanks for taking my call. I appreciate it. Sure. What's up? All right, so me and my wife are currently, have no debt, looking to purchase a house in the upcoming couple years. We have a little bit of a,

disagreement on how we are going to be saving the money. I have a higher risk appetite than she does. I would like to put it into like a diversified ETS and try to get the money to work for us for the upcoming few years before we purchase. And she would like to put it into a high-yield savings account so we know exactly where we're going to be in three years. How would you suggest to go about financing? a compromise, which that's.

Well, I think what you both need to realize is that this decision is not going to keep you from buying a house or cause you to be able to buy a house. So let's do the math for a second. I'll show you what I'm talking about. How much are you talking about saving? We would like, I would like to purchase a house that we're going to be in for the next 30, 40, basically our lifetime. Good luck with that.

But yeah, it usually doesn't work that way. But how much are you talking about something? saving in the next three years? About 200,000. Okay. And so if you make 10% on this money, you're going to make $20,000. If you put it in a high-yield savings, you're going to make nothing, and you'll lose $20,000. But $200,000 is what's going to cause you to be able to buy the house, and $220,000 is not going to cause you to buy a substantially different house.

So the fact that you made a little money on your money is more of an intellectual exercise. than a factual change in your situation. Okay. That makes sense. I'm following you. Okay. And the same thing's true with her. Let's say you put it into an ETF and it did not make 10% a year.

You had a bad three-year run in the stock market. Stock market in general was down. You got tagged in the face with this thing, which could happen in a three-year swing. And you don't have $200,000. You end up with $180,000. So you actually lost money. You follow me? Still doesn't keep you from buying a house.

So my point is your concern that you're not making a bunch of money is somewhat mathematically invalid. Her concern that you're going to lose so much that you're going to not be able to get a house is also not really mathematically valid. This is all more about a motion than it is actual dollars. Okay. Yeah. That makes sense.

I'm following you. Yeah. So anyway, all that to say, how do we solve this? probably at our house, we'd probably end up splitting the baby. We'd probably let me do put 100,000 over in investments, and she'd put 100,000 over there, and at the end, we would see who won the bet. So you would say, do a 50-50 down the middle.

Yeah, yeah, I don't think there's anything wrong with that at all. But again, before you do this, both of you need to really own the fact that this is not going to cause you to buy a house or not buy a house. It's just more of an argument over how we park the money. So I got a way in here. You know, look, I think you do exactly what Dave just laid out. Walk her through that, both sides of the coin.

Then I would see how she's reacting to that. And if her safety gland is still flaring, I'm going with mama. You know what? Happy wife, happy life. What's the other alternative? That's the other alternative. Yeah, you don't lose on that one. Because if you win, if you put it all in there and you go down 30 grand,

I told you so. That's going to cost you 30 years of remembering that. Yeah. It's the truth. It may be some jewelry. It's going to cost you $1,000 a year in memory. That's my tip. Remember back in old 23 when you didn't do what I said do? Oh, that's true.

They have memories. Oh, they have memories like elephants. Elephants have nothing on women. Yeah, this is true. They remember forever. especially when they're right. That's even more devastating. Which, again, if you want to be married.

Which is most of the time. That's what you need to come to that conclusion as well. So this is not even a mathematical question at all. Who can find a virtuous wife for her worth is far above rubies? The heart of her husband safely trusts her. And he will have no lack of gain. So at our house, we probably, today we would split the baby 20 years ago when we were still a little fresher.

The nerves were still a little more raw after going broke. We probably would have parked it in a high-yield savings and we're not taking any risk because Sharon was so terrorized. Yes. Emotionally by what we went through that it took a decade for her to go. And we had to have a big old pile of money where she could go, oh, if you screw that up over there, it ain't going to kill us. And she's still one of the most frugal people I know. Oh, my God. It's extraordinary.

It's extraordinary. It's extraordinary. It's extraordinary. up an old used golf ball like no one I have ever seen. We have a collection of old used golf balls. She's over the weeds picking up. She's going to get bit by a snake, getting a golf ball that's worth 50 cents because it's already been hit by the mower.

Yeah. It's unbelievable. The woman is, oh, gosh. Yeah. No, frugal, frugal, don't even touch it. Yeah. Hi, Josh. How are you?

Doing great. How are you doing, Dave? Better than I deserve. What's up? So, a question for you. But my wife and I have a household income of just over 100,000, and we're completely through Baby Steps 1 through 3. And I'm wondering how, with the current house market, we don't have a home, or saving up for a home,

how do Baby Steps 4 and 5 change for us? Why would they change? We are just saving up for home and working towards that down payment. We're almost ready for the down payment. Okay. Have you ever heard us talk about the thing we call Baby Step 3B? I have heard a little bit, yes. Okay, that's what you're talking about, I think.

Okay, so you finish your emergency fund at three. That is the point at which you would begin to save for your home. And some people push pause and don't do four, don't start saving for retirement until they build their fully, until they get their house down payment. Some people save for a house while they're putting something in retirement up to 15% for baby step four. so you can do either one or both somewhere in there.

So how long is this going to take to save up your down payment? You have a specific goal? I think in mid next year we're going to have a little bit larger down payment than is required. And we're doing 8% of our household income into Roths right now. Okay. And so while doing 8% you'll still have that down payment by mid next year. Yeah, we're putting away 8% into the Roths and about 40% of savings just goes away into CDs until we're ready for a down payment.

That's fabulous, Josh. Well done. Yeah, that's what we would call baby step 3B. So 3B is all of your savings goes into your house down payment fund, or down to a little bit less, a little bit less, a little bit less than all because you're putting some or up to 15% into retirement. So you're putting eight into retirement and you're still going to make your down payment goals. Doesn't change the thing.

It's exactly what I would do. Have at it. Okay. And then would you hold off at all until interest rates come down? Nope. Just when we get that down payment ready. Nope. Buy a house when you're ready. Okay. Because here's the thing. If interest rates come down if you buy the house, refinance.

House prices aren't coming down. We've not seen substantial drops in house prices ever in the real estate market except during the 2008 debacle. And we're not going to see them now. We've told you this for two years because we've still got a shortage of housing. There's not enough inventory. Too many buyers chasing too few items causes price to maintain stability or go up. So house prices are going to be going up, and I wouldn't sit around and watch the house prices go up while I'm waiting on interest rates to go down. Bad plan.

I don't time the stock market or the real estate market. Exactly. Both involve some risk. The only time I would time the real estate market is if I can't find a deal when I'm buying an investment property. And then wait. Because the market's like white hot and there is no deals. I'm just don't buy unless I get a good deal. Period. I do not buy investment property unless I steal it. Period. I want to get a great buy on

property. Your money's made at the buy on that. But as far as your personal residence goes, buy when you're ready, which is when you're debt-free, have your emergency fund in place and have saved your down payment. Yeah. And I get interest rates that've got people freaked out because, you know, it's hundreds of dollars more in your payment. They're going, well, I need to wait. The problem like you're saying, Dave, is those same people are going to call us and say, Dave, I waited and now the home price is 100,000 more than it was. Well, and there's no guarantee interest rates to come down. I mean, we just saw the Fed just... What if you sat around and waited and they went to 10?

Yeah, they just raised the rates again. So we just don't know. In 1978 September, I got my real estate license. I was 18. That was the year interest rates went from 9 and 3 quarters to 10% for the very first time ever. And if it did it then, and then it went on up to 18 before it came back down, and it took it a decade to do that reversal to go on up and then back down. If it did it then, why can't it do it now?

I mean, I don't know. These bozos continue to screw with this. They're going to mess it up. I mean, so I wouldn't be sitting around waiting on the outside environment to get you ready. You get ready. Strike while their iron's hot. When it comes to saving up for a house, a good rule of thumb is this. A smaller down payment means you're going to borrow more on your home.

Obviously, a bigger down payment means you're going to borrow less, and ultimately you're going to pay off your home faster. It'll be a challenge, but your perseverance will pay off. big time. All right, guys, thanks for listening, and make sure to share this with your friends in the market for a home. And don't miss the next episode to find out which mortgage traps you don't want to fall in.