Don't Buy Too Big of A House - Avoid Crushing Your Finances - According to Dave Ramsey

Updated: May 13, 2018



If you're considering buying a home, you may be looking into how much you should spend on the purchase. There are many ways to look into how to budget, and everyone's income, expenses and budget will vary. If you're looking to buy a home, a simple way to determine just your monthly mortgage payment is to calculate a 25% off your net monthly income.


Dave Ramsey provides a detailed explanation and sample budgeting process below. Give or take a few things, you may not spend over $700 per month on one child (unless your child arrived in a new BMW); but it is a good basis to determine your own home buying budget.


Read the full article and others at Dave Ramsey's website


It’s easy to feel overwhelmed by all the decisions that go into buying a new home. Brand new or existing? Cottage or McMansion? Fixer-upper or move-in ready? City or country? After all, a home is a big purchase, and you want it to be a blessing for many years to come.

But one question holds the key to home-buying success: how much home can you afford?


Lucky for you, you don’t need a degree in rocket science to find the answer. You just need to know how to budget. Here are five steps to buying a home Dave Ramsey recommends to make the process smoother.


Step 1: Add Up Your Income

You can’t make a budget if you don’t know how much you can spend. So sit down and add up every source of income you receive each month.


Let’s crunch numbers based on a two-earner household. In our example, John brings home two paychecks a month, while his wife Jane receives one.


John’s Paycheck 1 = $1,600 John’s Paycheck 2 = $1,600 Jane’s Paycheck = $2,800


Total Monthly Income = $6,000


Step 2: List Your Household Expenses


Next, write down every place your dollars go each month.


John and Jane rent a one-bedroom apartment in the heart of town so they can be close to work. A big chunk of their budget goes toward saving for retirement and a down payment on their new home. Here’s how their current budget looks:


John and Jane’s Pre-Home Budget Charitable Gifts = $600 Savings = $2,200 Rent = $900 Utilities = $300 Food = $400 Clothing = $100 Transportation = $450 Medical = $400 Personal = $450 Recreation = $200

Total Expenses = $6,000


Of course, everybody’s budget is going to be different. We’ve assumed some things in this sample. If some of these categories don’t fit, feel free to make them your own.


Step 3: Calculate Home-Ownership Costs


Dave Ramsey recommends your housing payment, including property taxes and insurance, to be no more than 25% of your take-home income. 


To maximize your savings, you should get a 15-year, fixed rate mortgage.


That means the maximum amount John and Jane should spend on their home payment each month is $1,500. Of course, home ownership isn’t limited to a house note. John and Jane make room for expenses like HOA fees, maintenance and repair, furniture and décor, and lawn care in their budget. They also add extra heft to utilities and transportation since they’ll have more square footage and a longer commute in their new home.


John and Jane’s down-payment goal will be complete when they purchase a home, so they reduce the amount they allot to savings.


If you need help figuring out how much house you can afford, we suggest using Dave Ramsey's mortgage calculator


John and Jane’s Budget: Changes Made With Home Ownership in Mind Savings = $2,200 $900 Rent Mortgage = $900 $1,500 Other Housing Expenses = $250 Utilities = $300 $400 Transportation = $450 $550

Total Expenses = $6,000 $5,750


With these adjustments, John and Jane still have money left over—but the budgeting doesn’t stop here.


Step 4: Give Your Budget Room to Grow

Life is going to happen in the years you occupy your home. Before you get married to a mortgage, look ahead and consider events that might increase your living expenses down the road.


John and Jane don’t have children yet but hope to start a family next year. Guess what? Kids cost money! According to the USDA, a middle-income married couple spends an average of $727 a month on non-housing expenses in a child’s first years of life. Depending on what you make or where you live, it could be more, it could be less.


John and Jane build cushion for Junior into their budget by parking an additional $750 into their savings account each month. That puts their savings total at $1,650 and bumps their monthly expenses up to $6,500.


John and Jane’s Budget: Changes Made With Junior in Mind Savings = $900 $1,650

Total Expenses = $5,750 $6,500


Step 5: Make Adjustments

Right now, John and Jane’s expenses outweigh their income by $500, so they’ve got some balancing to do. John and Jane realize that spending 25% of their income on a mortgage will squeeze out their ability to afford diapers and daycare. So they aim for a more conservative home payment and tighten the purse strings in a few other areas.


John and Jane’s Final Home-Buying Budget Charitable Gifts = $600 Savings = $1,650 Mortgage = $1,500 $1,250 Other Housing Expenses = $250 Utilities = $400 Food = $400 Clothing = $100 $50 Transportation = $550 Medical = $400 Personal = $450 $400 Recreation = $200 $50

Total Expenses = $6,600 $6,000


When income minus outgo equals zero, your job is done because every dollar has a name.

$6,000 - $6,000 = $0


Success!


That means you can feel confident buying a home that won’t bust your budget. Just keep your mortgage to 25%—or less!—of your monthly income and don’t borrow so much that you can’t breathe if life changes down the road.


Boost Your Buying Power

Now that you know the secret to being a happy homeowner, it’s time to go out and get the most home for your money! All you need is an expert negotiator by your side. A buyer’s agent brings your best interests to the table so you can get the best deal on a home that’s right for you and your budget.


Read More: https://www.daveramsey.com/blog/5-steps-to-buying-home-wont-bust-your-budget


Disclaimer: The content on this site is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment, financial or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities, or any other products, or services. All content and information is subject to change at anytime.

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Disclaimer: The content on this site is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment, financial or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities, or any other products, or services. Please note that some of the links on this website are affiliate links, and at no additional cost to you, Be Secure Financially will earn a commission if you decide to make a purchase after clicking through the link. Be Secure Financially recommends products/companies on this website/blog because they are useful and helpful to consumers looking to take control of their finances. All content and information is subject to change at anytime.

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