Dave Ramsey Says You Never Want a Mortgage in This Situation

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Don’t apply for a loan until you’ve considered whether to follow this advice.

Key points

  • Dave Ramsey has warned about the dangers of taking out an expensive mortgage loan.
  • He believes you shouldn’t borrow if your housing costs will be more than 25% of your take-home pay.
  • This advice can be worth following, but with caveats.

If you are getting a mortgage, you need to be smart about it. It’s tempting to try to do whatever you need to in order to buy your dream home — especially if a bank says you’re allowed to borrow the money you require for the property. But you don’t want to jump into taking on a huge amount of debt without thinking through all of the implications.

That’s why you should consider some important advice from Dave Ramsey about one situation when you never want to take out a home loan. While not everyone should necessarily follow this advice to the letter, it’s worth considering his points before you agree to borrow.

Here’s when Ramsey says you shouldn’t borrow

According to Ramsey, you should always say no to a home loan if the monthly costs of your housing expenses would eat up too much of your income.

“You never want a mortgage with a monthly payment that’s more than 25% of your monthly take-home pay,” Ramsey warned. “That 25% limit includes principal, interest, property taxes, home insurance, private mortgage insurance (PMI) and homeowners association (HOA) fees.”

Ramsey says not to accept a loan that comes with higher payments than this amount because you’d be “house poor,” if you did. That would mean so much of your money had to go to your mortgage payment each month that you’d struggle to do anything else that’s important to you.

Should you listen to Ramsey?

Ramsey believes you should stick with a 15-year mortgage that allows your housing costs to come in below this 25% limit. That’s bad advice. A 15-year loan has much higher monthly payments and there’s a huge opportunity cost to committing so much of your monthly income to housing payments when you could get a 30-year loan that would be much more affordable and leave you extra cash to invest.

More: Check out our picks for the best mortgage lenders

But Ramsey is right that you can’t commit a huge portion of your monthly income to home loan payments without making major sacrifices and significantly increasing your stress. While some other financial experts suggest you could go up to 30% of your income (or even a little higher if you have no other debt), the basic premise is the same — being house poor is a bad situation.

Now, if you live in a high cost of living area, are careful with money, and don’t owe for other things, and you really want to become a homeowner, then you may be willing to sacrifice to spend more of your monthly income on your house. And that’s a decision that can sometimes make sense, especially if property values rise quickly where you live so homeownership will help you grow your net worth.

But, just be aware of the serious dangers of overspending on your house and don’t go into a transaction where you borrow more than around 25% to 30% (at most) without actively considering the downsides — and trying out that higher monthly payment first to get a feel for what it’s like to live on what’s left over.

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