Dave Ramsey is simply wrong about buying a house in 2023. While the Dave Ramsey Show offers a lot of great financial advice, there is one big flaw when it comes to Dave’s 25% House Rule in that it’s not practical for the majority of most first time home buyers. In this episode, we discuss Dave Ramsey’s advice on becoming a homeowner, what you need to do in order to buy a house along where we agree/disagree to help you become The Educated HomeBuyer.
✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert
Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: firstname.lastname@example.org ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
📩 – email@example.com
For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: Dave Ramsey’s advice might make it near impossible to buy a home. And in today’s podcast, we’re gonna be talking in detail about Dave Ramsey. Dave Ramsey comes with a lot of wisdom, a lot of really good advice, but some of it isn’t really practical, especially if you’re in high cost areas.
So what we’re gonna do today is break down the five, the six top things that Dave Ramsey recommends when preparing to buy a home. We’re gonna give our little spin on it. We’re gonna talk about what Dave says about it in order to help you become The Educated Homebuyer. Josh, like I said, Dave comes with a lot of wisdom, a lot of really good quotes.
Things like if you live like no one, later you can live like no one, right? So the idea is if you can sacrifice that….
[00:01:31] Josh Lewis, Certified Mortgage Consultant: Well they don’t wanna be no one Jeb. No other, live like no other. So you can live like no other. Don’t wanna live like no one.
[00:01:37] Jeb Smith, Huntington Beach Realtor: The quote is no one. But nevertheless really good advice. If you sacrifice now you can put yourself in a position to do things that others can’t do later in the future. And by all means really, really good stuff. But in some cases you just have to push forward because, home ownership creates generational wealth. We’ve talked about that, but following some of this advice, you’ll never be able to buy a home.
So with that, Josh, I think let’s just start at the top. You know what Dave Ramsey believes maybe some of the flaws in the initial thinking, and then we’ll dive into it.
[00:02:10] Josh Lewis, Certified Mortgage Consultant: Absolutely. And I’ll just double down on what you said. Anyone who’s ever sat behind a microphone, whether it’s a podcast, you make videos on YouTube. I used to do a bunch of radio. Dave Ramsey is king. And for very good reasons. He has a system of knowledge that works for a large group of people. The reason why he is the biggest financial radio personality in the world is because it’s middle of the bell curve, middle to left of the bell curve for the majority of people and for any of those struggling with finances.
His advice is going to move you up the food chain. It’s really conservative. We gotta remember that he came out of the south. We gotta remember that he was a real estate investor, lost a bunch of properties. We did our episode last week, Jeb, on Mistakes we’ve made. He’s got great stories about the mistakes he’s made and that’s informed [00:03:00] his thought process and decision making.
So we believe lot of good advice in here. Meshes closely with a lot of what we advise, but some really big portions are way off. And if you follow them or attempt to follow them, especially if you don’t live in the South where homes are cheaper, in the Midwest where homes are cheaper, you are never going to be able to get where you want to go utilizing home ownership as a pillar of your life lifetime wealth building.
[00:03:27] Jeb Smith, Huntington Beach Realtor: No, absolutely. Again really good advice, not practical for the majority of people out there, especially in high cost areas. So let’s start with the first principle that he teaches, or one thing that he’s really big on. And that’s the idea that you shouldn’t be buying a house until you’re completely outta debt and you have money in some sort of reserve account. Six months of reserves if you will. So, what are your initial thoughts when I say that? The idea of not buying a house until you’re completely outta debt.
[00:03:56] Josh Lewis, Certified Mortgage Consultant: Let’s start with the portion of it that I agree with. You have to have a manageable debt load. I regularly have people reach out and they make good money, and there’s such monstrous debt in terms of total credit cards, total installment loans that I look at it and go, we have a bigger issue here in terms of how you’re allocating your resources.
You are making good money, but you are living beyond your means if you are relying on this much debt. Occasionally we can be on the other end of the spectrum. They don’t make a lot of money and they have to live that way. Either way, not a great recipe for owning a home, but let’s clarify what Dave means.
He’s not kidding around with no debt. Like he’ll tell you buy a used car, pay it off as quickly as possible. So we’re not talking about, Hey, I have a $300 car lease or car loan. That’s reasonable. That’s, 3%, 5% of my income. That’s a reasonable number. He literally wants you to have no debt. Now I don’t follow him closely enough to know exactly what he means in terms of credit cards.
I have a lot of clients that use credit cards, and when we pull the credit report, you’re looking at a thousand dollars, $1,200, $1,500. They’re trying to get miles, points. Maybe it’s the Target card that gets you 5% off. All of that stuff. People use credit for very reasonable reasons. So I don’t think you need to get dogmatic about this and sit here and say, until everything on my credit is zeroed out I shouldn’t buy.
And we didn’t put this in the outline here for the show, Jeb, but one of the areas where I 250% disagree with him and that he’s horrifically wrong is pay off your debt, don’t use credit. It’s okay to not have a credit score. When you go to get a loan, if you have achieved his milestone of having no debt and not using credit for the last 2, 3, 4 years, you will not have a credit score.
If you are attempting to get a conventional loan, that will be problematic. 90% of lenders will not do that loan, the ones that will do not have the best terms. So you are not going to get the best terms on your loan.
[00:05:55] Jeb Smith, Huntington Beach Realtor: And with that, one of the things that he talks about, one of the principles we’re gonna talk about is that [00:06:00] he believes that you should basically have a mortgage payment that is manageable. And that seems pretty common sense approach. So when I think of that, I think of having a budget, knowing where your money goes, and if for example, that you make X amount per month, right? And you’re comfortable with whatever that mortgage payment is, and you have a credit card. You have some student loans, maybe you have a car payment, but yet you’re still comfortable with the idea of having a mortgage and having these other things that you’re going to be paying anyway. I don’t think you need to have zero debt. It’s all about being able to manage that money. The thing is, he never talks about the idea of you should have zero debt before you rent.
You gotta have something, right? So if you’re trading one for the other, you’re better off owning a home for the things that we’ve talked about in other episodes, paying down the principle, appreciation, forced savings, all of those things where you’re not getting it in rent at all. And in sometimes when you’re renting, you have those debts. I think yeah, it would be really good to be able to buy a house, have absolutely no debt, be able to take one of the principles that he talks about, which we’re gonna save till the end is how much money you should spend on your mortgage, which is absolutely insane, but being able to really be able to push that number, if you will, by having no debt.
So again, good advice. But not practical.
[00:07:20] Josh Lewis, Certified Mortgage Consultant: And look at it this way, Jeb, in terms of credit card debt, you need to look and say, why do I have credit card debt? If you have a small revolving balance that you pay off every month, that is not a problem in any way, shape, or form. If you have a $5, 6, 7, 8, 10,000 balance, maybe you made a big purchase and it’s 12 months 0%, you have a reason why you’re using someone else’s money and you have the ability to repay it. Also not a problem.
I want you to look at your credit card debt and say, am I living beyond my means? Can I not use my debit card for all of my purchases? ’cause you’re going to have to cut somewhere if that’s the case. You are relying on income going up to eventually eradicate that debt or a year end bonus. So think along those lines.
And the last piece, Jeb, I wanna touch on student loan debt. I have, a lot of clients are in public servant loan forgiveness programs. I have a couple of lawyers just in the last year that had $350-400,000 of student loan debt. They both got it completely forgiven.
If you’re in an I B R plan and you’re making $200 payments on $400,000 of student loans and after 120 months, that’s gonna go away, that doesn’t need to be factored into your planning. You have a plan for taking care of that debt. So rather than just blanket approach, no debt, think through what is this debt? Why do I have it? What is my plan for paying it off? And does having this debt mean that I’m living beyond my means?
[00:08:46] Jeb Smith, Huntington Beach Realtor: Good stuff. And so now we’ll go into the second piece, which is having a good down payment. And when he says have a good down payment, he strongly believes that you should have at least 20% down to buy a home so that you’re avoiding [00:09:00] PMI.
And again, it’s not advice that I disagree with. I think it’s great advice if you have the 20%. If you have the means to get the 20% in a reasonable amount of time. Some people don’t, right? You live in the state of California, median home price at the moment, roughly $850,000. So in order to get 20% down, you’re talking about a hundred and nearly $170,000 that you’re going to have to be able to save.
And some people just don’t have the means to be able to do that in a reasonable timeframe. So Josh, Let’s talk a little bit about down payment. The idea of avoiding PMI. Yeah, PMI gets a really bad rap. You should absolutely avoid it if you can. But to some degree, it’s the cost of doing business, right? We’ve talked about the cost of doing business may be the mortgage insurance. When you don’t have that 20% down.
[00:09:51] Josh Lewis, Certified Mortgage Consultant: Not only is it the cost of doing business, I just ran a quick number and I actually went through this calculation with a client yesterday. They’re up in North Idaho. They’re buying a cool house, $525,000, they can do 10% down.
We ran through the numbers they were gonna have far and away the lowest payment with FHA financing. So they were gonna do 10% down is $52500. We ran through the numbers and I said, you qualify with doing 5% down. At 5% down, you get a slightly reduced mortgage insurance rate.
[00:10:19] Jeb Smith, Huntington Beach Realtor: Dave would be pissed!
[00:10:20] Josh Lewis, Certified Mortgage Consultant: Dave would be pissed. Correct? So like literally, this is terrible advice, terrible idea….
But here’s what it comes down to. The difference in payment is $156. And I can tell you 98% of my clients will answer this question one way. Would you rather have $156 lower payment or would you rather have $25,000 in the bank?
And the answer is always, I would rather have $25,000 in the bank. And the funny thing is, we are talking about this at cross odds with what Dave is saving saying. Dave is saying, have a reserve, have savings, have something to fall back on. But he wants you to do both. And we just talked about it again, north Idaho, $525,000.
And this isn’t a mansion, it’s a nice house. But we’re trying to say in high cost areas, can we do all of these things? Can we have some savings? We have a manageable payment. They have a reasonable debt load, low 30% debt to income ratio, even with the higher payment. So when you’re working with a mortgage advisor, Not a guy on the radio telling everyone in the millions of people in the audience listening that they should all look at this the same way.
You have to run the numbers and say, what do I value? What is more important? Because for most people, having all of those things, a 20% down, 12 month in savings, avoiding mortgage insurance is not possible. And I don’t even, Jeb, you said mortgage insurance is a necessary evil. Mortgage insurance is not a necessary evil. It is a gift from God.
Absent mortgage insurance.
[00:11:46] Jeb Smith, Huntington Beach Realtor: Did you just put words in mouth?
[00:11:47] Josh Lewis, Certified Mortgage Consultant: No, you said necessary evil. If you want, we can rewind it. We can play. You said mortgage insurance is a necessary evil. And it’s not.
[00:11:55] Jeb Smith, Huntington Beach Realtor: This is like having a conversation with my wife. I don’t feel like I said that.
We’ll [00:12:00] rewind it. We’ll have to rewind.
[00:12:01] Josh Lewis, Certified Mortgage Consultant: We’re gonna rewind it. Hopefully I didn’t paraphrase you too bad. It was in essence what you said. I will go back and say it is actually a gift from God. ’cause absent that, you are going to have to put 20% down. So you have an example here, Jeb, a $426,000 home. Median price in the US. That’s $82,000.
How many people come to me with $82,000 in the bank
[00:12:24] Jeb Smith, Huntington Beach Realtor: It’s actually $85,000, so $3,000 more.
[00:12:27] Josh Lewis, Certified Mortgage Consultant: $85,200 You’re correct. I’ve been dyslexic here in my reading, but in looking at that, I can tell you very few of my first time buyers have accumulated that amount of money. Especially if they’re first time buyers on the early end, 30, 32, 35, they might have $40-50,000 in their 401 k and 20, 30, 40, $50,000 saved.
That is an astronomical number. So what I always wanna do is put into context. MI gets a bad rap because people think it’s this horrifically expensive thing. So let’s look at this. On a conventional loan, it’s gonna vary by a number of factors. How many borrowers, credit scores, how much you’re putting down.
If you put 3% down, it’s gonna be very different than 15%. So I ran the numbers. Your best case is 0.10, your worst case, and there’s a caveat there with worst case, worst case is about 1%. If you have a sub 680 credit score, conventional is not the right loan for you. If you have a 620 credit score and you’re trying to do 3% down the mortgage insurance could be 2%.
That’s just a wall. There’s no world in which if you have a 620 credit score and only 3% down, that it makes sense for you to pay a 2% premium. But looking on FHA, depending on if you do the minimum down or put 5% or more down, anywhere from 0.50 to 0.55%, VA has nothing monthly. They have an upfront mortgage insurance premium.
USDA is 0.35% and both FHA and USDA have an upfront component of it as well. But when we do a true apples to apples comparison and do the numbers, all of my clients look and go, I would rather have the extra money sitting in the bank than have that slightly lower monthly payment.
Or they would say, I would rather buy today than wait three and a half years until I have 20% down. If they’re in a good position and aggressively saving. ’cause let’s just say you, you ran the numbers a week or so ago on the show, Jeb, over the last 40 years, I think from ’82 or so, we’re at like 5.6% national appreciation, over 5%.
Not to say that guarantees future returns. Were coming off a period of years here with very high returns, but if we hit 3% over the next three years, that home went up 10% in cost. If we’re at that median there of $426k, the home went up $40,000 while you were trying to save the 20%. There’s another 20% on that 40,000, another eight grand you needed to save.
It’s a treadmill that you cannot, it’s going too fast. It’s a treadmill that’s running faster than 99% of people can run. And it’s a recipe for just wearing yourself out and quitting.
[00:14:49] Jeb Smith, Huntington Beach Realtor: No and It’s easy to stand on top of your soapbox and preach down to everyone else once you’ve gotten to a financial position where things are a bit easier, right?
[00:15:00] And some people look at Josh and I in the same position. Hey, you guys are already homeowners, so it’s easy for you to have these conversations. What we’re trying to do here is provide some context and say, Yeah, it’s great to have 20%, but it’s not necessary. You’ve gotta be comfortable with it, right?
It’s not, Josh being comfortable, myself being comfortable, Dave being comfortable. Dave doesn’t know your financial position. What he’s doing is throwing a blanket statement out for the majority that meets the masses, right? Because the masses can’t budget, the masses don’t budget. The masses rack up tons of credit card debt, put themselves in financial positions where home affordability is worse than all time lows to some degree, and just aren’t in a position to buy a home.
You guys are doing the right things. You’re educating yourself. You’re putting yourself in the right position by being in conversations like this which already tells me you’re not part of the masses.
Now, if the advice works for you that you need to do it, great, but understand. Once you start talking to a professional, have the numbers run both ways, right? Josh said they had 10% down. He could have just taken it, Hey, I’ll do the 10% down that you want and give you what you want. But as a professional, he says, Hey, here’s some options.
Here’s 5% down. Here’s 10% down. Which would you rather do? Which makes more sense for you financially? Puts you in a stronger position that if something does go wrong, Hey, you got some money in savings. You got that backbone to fall back on. So again, I’m standing here on a soapbox saying that, but I think it’s important to note that you gotta see both sides and see where you fit into that equation.
So Josh, we referenced this one earlier. It was the idea of being able to afford your monthly payments and throwing home maintenance into that same category. Now it’s crazy that we’re even having the conversation that you should be able to afford your mortgage payments.
But again, there are people that get themselves in positions where they stretch everything. They use every dollar they have to buy the home. Therefore, they don’t have expenses for things like potential maintenance, which we’ll talk about in a little bit more detail. In fact, we’ve talked about it on other episodes. And they don’t have the rainy day fund, if you will if they lose their job or something happens there.
So let’s talk about that.
[00:17:12] Josh Lewis, Certified Mortgage Consultant: A million times here on the show we’ve talked about people will come to me and say, Josh, what can I afford? And I tell them, I have no idea what you can afford. I can tell you what you qualify for. In a couple of examples fHA loan will let you go to a 57% or 56.99% debt to income ratio.
I have people that we pre-approve and I look at it and go, this is a recipe for disaster. One of our favorite clients that we talk about here regularly on the show, Jeb, was a VA buyer. 70% debt to income ratio. And I had no worries with that whatsoever because knowing his situation, knowing his credit score, and knowing his debts and knowing his life situation, there was a chunk of income that was not being accounted for in that process.
So really, unless you have gone through and done that budgeting [00:18:00] process and know how you spend your money… one of the reasons why VA loans have the lowest default rate is it’s the only loan program that does a residual income calculation.
So they figure, how many kids do you have? How big of a home are you buying? What are the utilities expense? What is your net income? Not your gross, what’s your net after you pay your taxes? They run that and they’ll go to a much higher debt to income ratio ’cause they can look and go, Hey, there’s $900 left after all that’s done to live off of. After all of those things are accounted for.
Now when we look at that, What are the things that possibly don’t ever show up in there? We talked last week on the live show that I had a client that we pre-approved a week or two ago that we’re going through the numbers and I’m like, I don’t get it. He qualifies for a lot more than he’s telling me he can afford.
And we get down to it and he goes, just so you know my second child will be starting school. We send both of them to private school. $1,200 each per month. So they have a $2,400 commitment for, what is that 13 years Jeb? From when they start school to when they’re finished with high school, even if you don’t pay for college.
So he said, I am comfortable with this monthly payment. He had his budget, it was dialed in. Now maybe your spending category is not $2,400 a month on sending your kids to school. Maybe you’re a single girl and you love vacationing, and twice a year you take an extravagant vacation, that’s seven, eight, 10,000.
It sounds way more fun than sending kids to private school. But you know that, hey, at the end of the year, I’m spending 15 to $20,000 on vacations, and I do not want to change that. So that’s where that budget comes into play. I think Jeb, relating back to what your debts are, if you’re not budgeting, You may not even understand why that credit card has gone from $1,500 to $5,500 over the last three years.
You need to pencil that budget out. There are tools online that will suck in your debit card, your credit card, your bank accounts, and all you have to do is go and categorize one time. And from then on, the AI is gonna just categorize those things. You get a nice report at the end of the month, and a lot of times it can be eye-opening.
Most people have no idea how many subscription services they have, and if they do, how much that amounts to every month. I just got the one from Spotify the other day. Our Spotify’s going up $3 a month. Is that a big amount? No, but if you have 10 streaming services, they all over the course of 18 months go up 3%.
You’re talking $30 a month. And there might be one in there that’s now, it started at $12, I think when I started with Netflix it was eight bucks and now they’re up to $ 20. And you go, I don’t watch Netflix. Do I wanna pay $250 a year to have Netflix? So budgeting is really important. And we talked about this Jeb, you and I did yesterday.
Maybe you don’t have to have a lifelong discipline of budgeting. I can tell you I do not. I don’t budget every month. I know what it looks like. It’s hard for me in the commission industry where income can be way up, way down. So it’s not a salary coming in every month where I know what that looks like. But you have to do it for a period of time.
[00:20:51] Jeb Smith, Huntington Beach Realtor: Yeah.
[00:20:52] Josh Lewis, Certified Mortgage Consultant: You have to get comfortable with where does my money really go and what am I spending it on? Because you know what you can afford, I [00:21:00] know what you can qualify for.
[00:21:01] Jeb Smith, Huntington Beach Realtor: No, and to speak to that I’m not one that looks at a budget, puts every single line item into a spreadsheet every single month to know where it goes. I got three kids. I’ve got a wife and myself and commission business, different incomes coming in and out. But I will say that I have a spreadsheet that I go through probably once a quarter and say, okay, what are we paying? What has to be paid every single month, right? What is, regardless of what happens to income, what happens, this stuff comes out and needs to be taken into account.
That’s where you gotta get comfortable and knowing where your money is going. Like Josh said, with subscription services I was on my computer last night. And about a, I don’t know, a month ago, my son said, Hey dad, can I buy this thing? And I said, what is it? He told me and he said, it’s a yearly service.
And I was like, dude, no. He goes, I’ll cancel it after the first month and I said if you don’t, you’re gonna have to pay me. He’s 11. I’m like, dude, you’re gonna have to pay me for it. And so he paid for the initial thing. I think the thing was like 30 bucks. So he gave me 30 bucks.
And last night, in fact funny that we’re having this conversation now, I got an alert on my phone, $3 and 99 cents being charged from Nintendo to my card. I’m like, what is that? I go in there. Lo and behold, it’s the conversation that we had. I go, dude, you didn’t cancel this. You owe me four bucks.
And so he went and got four bucks. Actually gave me five. So I made a dollar out of this deal. Hey, 20% interest on this, 25% interest rather. And I went in and canceled the thing on his behalf because it’s the conversation we had. So again, it’s just knowing where your money is going so that you have an idea so that you’re comfortable.
And if you’re in a position where you receive W2s and you have a set salary, it’s a lot easier than Josh and I’s position. And it’s not impossible with our position, let’s be honest. It can be done. It’s just more difficult to do. And it’s something that if you’re not doing, you at least need to get an idea of what that looks like.
So with that, Josh I’ll be honest, I don’t budget for home maintenance expenses, so things like the water heater, things like my roof, things like whatever is happening with the house, I don’t budget for those. Now, Dave believes that you should factor maintenance expenses, that sort of thing, into your overall budget. I’m not sure exactly how that’s broken down, but what are your thoughts on it?
[00:23:19] Josh Lewis, Certified Mortgage Consultant: I would say the same. I know what the ongoing expenses. We have a gardener, a pool guy, lawn maintenance, person that comes and cleans the house. So those things I have to account for and I know what they are and I know can we afford these? Is that reasonable? But in terms of things going on with the house, like upgrades, I do upgrades when I have the money. And again, maybe this is a function of being in commissioned industry when things are going well, hey, there’s some money over in the bank and we’d like a new hall bath. Okay, let’s do that.
The only thing right now that I can think in terms of, we had five years ago we had to replace the water heater, so another five, seven, 10 years, we’ll have to replace it again. Not a huge charge, but it’s a good example of something that could come down the line that you will have to replace regularly.
[00:24:00] My roof. We’ve talked about this on the show before. My roof was done in 2000. We bought in 2003. We’re 23 years into the life of a 30 year roof. Not nearly as great looking as it was. Just from an aesthetics perspective, I’m probably going to replace it before it needs to be replaced ’cause I don’t like looking at it not looking perfect. And that is a big expense. So I need to either say, do I have an account with a chunk of money in it where I can pay that? Or do I need to start setting aside money in the next three, four years to replace that roof? So it’s something to be aware of.
Generally, every rule of thumb that I see online, I go that vastly exceeds what we need to do. And remember this is also personal preference. My wife, she is a perfectionist, clean freak. Our house is perfect at all times. If you do not maintain your house that way maybe instead of painting every three years, you paint every seven years.
Maybe instead of getting flooring every seven years, you go 15 years. So know yourself, know what your expectation is of how you’re gonna maintain the home. But big picture I would say it’s an issue you need to be aware of. There are gonna be maintenance and expenses. I would say work with your realtor, Jeb on the way in of saying, what condition is this home in?
What things here could come down the pike conceivably in the next 10, 15, 20 years. And if you’re incredibly worried about it, I’m not a huge fan of home warranties, but a home warranty seller, eight times outta 10 buys you at closing that covers one year. You can renew that and that can insure you against one of these big expenses of having to do a furnace, a water heater. Those type of things, I think you’ll pay more over the long haul, but it fixes that cost and enables you to account for that.
So what are your thoughts on it, Jeb?
[00:25:44] Jeb Smith, Huntington Beach Realtor: Yeah, I think it’s all about knowing what you’re buying, but when you’re buying it, right? If you’re buying new construction, Probably less of a concern, right?
These aren’t things you need to factor in to start with. If you’re buying a house that has an original furnace, original water heater. Yeah, believe it or not, there are still houses that have water heaters from the sixties and seventies that still work. Amazing. Josh talked about
[00:26:04] Josh Lewis, Certified Mortgage Consultant: They made them better then..
[00:26:05] Jeb Smith, Huntington Beach Realtor: No, they did. It’s crazy, right? It was a different product back then. But these are things that you need to have in your head. So if you’re going in, spending all your money you might put yourself in a bad financial position. So just knowing this stuff, being aware of this stuff, being able to place it in the budget or whatever you wanna do to know that, hey, when this comes due, if it comes due, I’m in a position to pay it.
Side note I got a flat tire. Didn’t get a flat tire, but yesterday tread started coming off of one of my tires. I take it in. Again, I find out I need four new tires. The tires are 15,000 miles. That’s it. But because they’re a lower profile tire and whatever they need to be replaced. It’s a over a thousand bucks, right?
Fortunately, there’s money there to do that, but these are things that you gotta think about. Cars are different, houses are different. So just know what you’re looking at as far as expenses so that you can factor this [00:27:00] stuff in. Now I’ll go back to the home warranty thing, Josh, ’cause a lot of people have home warranties.
I’m not gonna go on a tangent about home warranties. I think home warranties can be a good thing. And a lot of people have problems with ’em because they call and the home warranty company doesn’t cover anything. Understand, the home warranty company is an insurance company.
They will fight against you in many ways to avoid paying things. If that’s the case, you have a home warranty, you have things that need to be replaced, and it’s reasonable for them to fix it and or replace it and they’re arguing, call your real estate agent. Get your agent involved in the situation, in the transaction, in that process. Because I can tell you I’ve had many things from clients that were told no by the home warranty company.
I called my account executive and got ’em done. I’ve had garage doors replaced. I’ve had built-in refrigerators replaced. I’ve had high ticket items that were declined get replaced. So that’s just my tangent there on home warranties. They can suck, but they can suck less if you know how to deal with them.
Now Josh, two things. Again, both important, really good advice from Dave and then we’ll get into terrible advice. Uh, really good advice. Having money to pay your closing cost, having money for moving expenses. So thoughts, when I say those and then any rebuttal to the advice.
[00:28:20] Josh Lewis, Certified Mortgage Consultant: I say, this is mind boggling to me but if you’ve listened for any period of time, you’ve heard me say multiple times, I’ll talk to someone who’s spoken with another lender and I go, I say, cool you’re approved for a $375,000 purchase. What was the loan type? What’s the monthly payment? And how much cash do you need to close on that? I got no idea.
So when we do a pre-approval, the most important thing that you can walk away with is, here’s my options in terms of loan programs. Here’s the one that’s best for me. Here’s what my payment is going to be, and how much cash I have to close on that purchase. So I really lump it under, it’s, Dave’s talking about, have a good down payment.
It’s really. Having enough money to close on a loan program that fits your needs and puts you in a good position. The second part of that, moving expenses, love to hear your perspective on this, but when I hear it, I go, Hey, most of my clients are moving locally, and if you have a couple friends and one of them has a pickup truck, moving expenses can be zero.
If you’re moving cross country and you have a two story 5,000 square foot house, it could cost you 10, $20,000. That’s a pretty wide range. You need to know where you’re moving from, and two, how much you have to move and who’s going to do that work. So again, it could be nothing. It could be, fairly significant.
What are your thoughts?
[00:29:40] Jeb Smith, Huntington Beach Realtor: I’m gonna disagree. I’m thinking once you’re outta college, you can no longer ask your friends to help you move. If you call me to help you move, we’re good friends. I’m gonna tell you, hire someone. Now if you need help with a piece of furniture, Hey, I’m your guy.
I’ll help you move the furniture. But I’m not getting caught up in moves. I’ve helped people do it after college. I’m[00:30:00] just being transparent. It’s a joke. No, like have money, dude. You’ve graduated college. You are in a position now to do your own moving.
That said moving locally, yes, Josh less expensive but there are cost of trucks. Rarely are you ever gonna be able to do it in the back of a truck, right? You got couches, you got bedroom furniture, you got mattresses. Typically, you’re gonna need some sort of moving truck. That stuff’s not cheap. Any of this stuff today isn’t cheap with inflation, with just costs going up.
To rent a truck for a couple hours probably gonna cost you a couple hundred bucks. If not more than that. You’re gonna need to buy boxes. You’re gonna need to buy tape. Yeah, there’s gonna be some expenses in there. You just need to have an idea. Don’t just think. Hey, Jeb, I get to move.
Yeah. Did you factor all this stuff in? No, I spent all of my money buying the house. So again, it’s important just to keep the stuff in the back of your head. Hey, I’m gonna have some expenses when this takes place. Now at the same time, Josh closing costs, right? We talked a little bit about closing costs.
If I think the realtor’s gonna pay my closing costs, if I think the lender’s gonna pay my closing cost, should I avoid having the money or is that something that I still should be having that fund?
[00:31:11] Josh Lewis, Certified Mortgage Consultant: Being able to make the closing costs, gives you options.
So let’s say, depending on where you are in the country, depending on how you’re structuring your loan, people will tell you two to 5% really should be, say, one and a half to three point a half percent. There are some high closing cost states where you may be towards the high end of that. If you have the money, you have the option of negotiating on every aspect of the property. Price, any number of things.
But if you don’t have it and you’re asking the seller to pay for it, then you are at the mercy of saying we’re not gonna cut our price. We want this number. Maybe the house doesn’t appraise. There’s any number of things. So it reduces your options, you not having the funds. And what I can say, There are companies online, Hey, use one of our realtors. We’re gonna credit you back some of your commission.
No one unless it’s like your mom. I have a client that’s actually gonna close this week. It’s not his mom, it’s a business partner that he’s a contractor, he’s done a bunch of work for the realtor, and she’s giving him $10,000 out of a $14,000 commission.
That’s about as aggressive as it’s gonna get. Most people are not going to work for free. So getting the entire bit of your closing costs covered by the realtor, covered by the lender, covered by the seller. Those all come with trade-offs. So if you’re able to do it and come up with your own closing costs, it just gives you more options and more ability to negotiate and be more aggressive when you find the exact right home.
[00:32:32] Jeb Smith, Huntington Beach Realtor: Yeah. And it goes back to budgeting. What we were talking about earlier. Just knowing that you have the money there, where it’s going or where it might go. And then if it doesn’t go there, then hey, you got some, maybe some extra money that you can do some other things with. Maybe it’s an upgrade or maybe it can go into that maintenance fund or whatever.
It’s just, being able to prioritize, categorize and have options at the end of the day. Now Josh, here we go with the terrible advice, in my opinion. Now if you [00:33:00] can follow this advice, if it fits your lifestyle and it’s manageable, fantastic. But I think for the majority of people out there, it is not.
And that advice, it’s called the 25% House rule. And essentially what it is, in order to calculate how much home you can afford you should only be using 25% of your take home pay after taxes are taken out. Okay, so we’re gonna talk about what that means.
So when a lender qualifies you, Josh, you guys are using gross monthly income before any taxes are taken out. And you’ve got lenders that will qualify you up to 50%, 57% in some cases depending on the entire load. And Dave is saying, use 25% of a smaller number.
So what are your thoughts?
[00:33:46] Josh Lewis, Certified Mortgage Consultant: It is nearly impossible. You have an example here you’re gonna walk us through, but it is nearly impossible. Even if we say, go get a time machine back to 2019. Home prices, depending on where you’re at, 30 to 40% lower. Interest rates, 50 to 60% of where they’re at.
It was really difficult. Impossible in Southern California. Impossible in the Bay Area. Impossible in New York, impossible in Boston. Lots of areas where it is just, you’ll never own a home. So unless you’re comfortable saying, Hey, I am never gonna be a homeowner, it just doesn’t work. Now most parts of the country got to participate in the runup over the last few years, and every part of the country is participating in the increase in interest rates.
So if you do not own a home and you would like to own a home following this advice is going to be about impossible. So forget whether it’s good advice or bad advice. Show the numbers here, Jeb, and show them how this is not even possible for the vast majority of first time buyers.
[00:34:40] Jeb Smith, Huntington Beach Realtor: Let’s just say, I don’t know what the median income across the United States is, but what we’re doing here is we’re using a hundred thousand dollars income. So for some areas of the country that’s gonna be really high, a hundred thousand dollars here in California, a decent income for a single person. But gonna still make it really difficult to do much, and we’re gonna talk about that here.
But if you make a hundred thousand dollars a year, that breaks down to $8,333 per month. Okay. Now if we say that, that’s gross monthly income, so before any taxes are taken out. Now he uses net income after your take home. Which in some cases could mean you’re paying into a 401k, you’re paying into a deferred comp. Your take home could be really shallow once factoring all this stuff in. So you gotta be able to take a step back and look at this.
But let’s just say, that $8,333 after taxes is gonna be somewhere between 6,000, $7,000 a month. Okay? Which for some people might be accurate. Some it might not be depending on exemptions. But if you took 25% of That’s $1,750. That’s based off $6,500. So $1,750 is what he’s saying should go to your mortgage payment. Now, the property taxes in some states are that amount.
But nevertheless, if you were to look at a $400,000 [00:36:00] home today and let’s just say an interest rate’s a 7%, interest rates are gonna change a little bit here and there but we’re gonna give you two different examples. So interest rates today, 7%, your mortgage payment, principal and interest, just your mortgage payment is $2,661.
That doesn’t count property taxes doesn’t count insurance doesn’t count anything else. So you’re already $900 above the amount that he’s talking about there. Now let’s just say we were able to take that same time machine that took us back to 2019 and it was able to take us back to 21, and you were able to get a 3.5% interest rate on that $400,000 home.
At that time, that payment was still higher than what he’s allowing at $1,796. So you’re still above that 25% number. You’re close to it, but still above it. So if you’re following his principles hard and fast, you don’t qualify for that home either. But let’s just say, for example, you’ve got your budget dialed in and you’re comfortable going a little bit higher on that number.
Say you’re willing to go to 40% debt to income ratio. That takes you up to $2,800 a month, which in the case of a 7% mortgage, you can now afford that $400,000 home. Now, if you’re here in California, that still doesn’t do much. Again, the median price here in the state of California is about $850,000.
In Huntington Beach where we’re located, it’s about $1.25 million. So it, it all depends, Josh, and what we didn’t factor in there, or what we didn’t talk about in there, is those people that bought back in 21 and were able to get the 3.5% rate, we’re just gonna use that for example, they’ve seen 35, 30% appreciation since they bought their home. So that’s a gain that they would’ve never been able to take advantage of had they followed these rules hard and fast. So what are your thoughts?
[00:37:46] Josh Lewis, Certified Mortgage Consultant: Let’s step back to a couple things. This is where budgeting comes into play. Someone giving you a hard and fast rule doesn’t work. You need to know how you spend, what your income looks like. No one has a crystal ball. We don’t know what the future looks like, but if you’ve been on a trajectory and you know you’re gonna get a promotion every two to three years, your company gives certain raises, you work for the government and there are certain cost of living allowances, you know what that looks like. That no one else can know.
So this is way overly conservative, will keep most people from ever owning a home. And when we look at that the important part is what are you missing out on by not being able to do that? I can tell you, I almost never have a client who is below a 25% DTI considering net income. I have a client here recently, we closed at a 33 or 34%.
Now granted this is California, much bigger than a $400,000 loan. I was like, oh, these guys are doing really well. They kept it at about a third of their gross income. It’s one of those things where you’re not gonna drive yourself into a ditch going this way, but you may never be able to get on the highway either. You’re just sitting in the car on the side of the road.
So from that perspective, is it good advice, bad advice? I just think it’s irrelevant. For [00:39:00] most people it just means, hey, I can’t even play that game. So you have to be prudent and think this through, but going back to your budget and knowing your numbers and working with a mortgage advisor who can tell you what you qualify for, then you can look at and say, here’s what I can afford in that it enables me to buy a home and continue to save money.
You and I think like the basic foundation of building financial freedom is having good job, good income, keeping good credit, buying a home, saving at least 10% in a tax advantaged account. With that, you will arrive at age 65 in really good shape.
We had a comment on the YouTube channel this morning. Someone thought they had made terrible mistakes, and she goes through and explains it all to me. She has a $1.3 million condo. She owe $280,000 on it. That’s someone who thought they made all the mistakes. So is it a guarantee? Are there other people who’ve done worse who’ve actually made real mistakes?
Yes, but looking at getting in at a reasonable level with a payment you can afford and letting time take care of it. Because in 20 years as a homeowner, you’re gonna be well below the numbers that he’s advising. It’s just very hard to enter the market with a ratio like he is advising.
[00:40:20] Jeb Smith, Huntington Beach Realtor: Yeah, we talk oftentimes about the prime buying age is around 33 years old. That’s when most people historically have been home buyers. And so typically, when you’re at 33, you’re at an income, usually an entry level type job for a large majority of people out there. Maybe you’ve moved, maybe you’ve got some stability in your job, but you’re still earning money, right? You’re still on that path of higher wages, higher success, and so if you’re able to, the earlier you’re able to fix that cost, the less of your budget it’s going to be long term.
And in this episode we’ve stressed a lot about the importance of home ownership from the financial aspect, we haven’t even touched on what it does for stability in families and the other things it creates. We started this podcast back in 2022, and one of the first episodes we did was talking about why home ownership is important and all of the things you get from home ownership, the benefits you get outside of the financial gain.
And I’d ask you to consider that. Again, we don’t want you to put yourself in a financial position where you’re not comfortable. You need to be able to sleep at night. If following Dave’s principles and roles put you in that position, fantastic. Stick to it, do it. Just know that it’s gonna put some limitations on what you’re able to do.
And if you’re okay with that, fine. There is absolutely nothing wrong with the advice. Stepping on my own tongue here to some degree, because I talked about how some of this stuff is bad. It’s not bad. None of it is bad. It’s difficult. And for some, it can put you in a position where you’ll never become homeowners.
And I think home ownership is that important that sometimes. You gotta be able to step outside of that box. And Josh, earlier you were talking about budgets. There’s a quote that I wrote down that is [00:42:00] accredited to Dave. And whether or not he said it, someone else said it. You never really know these things, but it says A budget is telling you where your money is going instead of wondering where it went.
So I think the idea of putting that money on paper, knowing where it’s going, where you’re comfortable for it to go, will put you in a better position long term. Josh, any final words?
[00:42:20] Josh Lewis, Certified Mortgage Consultant: What I would say is his advice is the real estate and housing equivalent to going to the bowling alley where they have the bumpers up. So if you’re a terrible bowler and three or four or five years old, you need that to successfully be able to bowl and put a score up. Otherwise it would be gutter ball, after gutter ball. If you are a reasonably athletic adult, even if you’ve never bowled. It’s silly. You can actually have a decent score. Maybe it’s a hundred, maybe it’s 120, and someone in the league is gonna look at you and laugh.
Or you might be that guy that plays in the league and he’s got a two 10 average. Absolutely doesn’t need those things. Would never even hit the bumpers. It’s overly conservative and not necessary for most people. So from that perspective, it’s just overly conservative. Again, nothing wrong, just like you said, you can absolutely if you’re able to buy, follow this advice, but it’s gonna keep a large proportion of the population outta the game that needs to be in the game.
[00:43:14] Jeb Smith, Huntington Beach Realtor: Now, one other piece that Dave talks about in his little breakdown here is the idea of working with a professional real estate agent. Now, As a professional real estate agent, something I largely agree with. Now, again, a lot of listeners out there are gonna say, Jeb, you’re just agreeing with that because it benefits you directly. No, there’s a lot of things an expert can do and can guide you through the process that will benefit you as a homeowner, as a potential home buyer, somebody going through the process.
Now, when I see Dave’s advice, there is a portion of it that the consumer should know, and that’s that Dave benefits directly from some of his advice in the sense when he talks about home ownership, oftentimes he’s always talking about his network. And his network is vetted. There are certain things that you have to be able to provide and follow in order to be part of his network, but also understand that there’s a monthly fee associated, all of them, they pay a fee to be a part of this network.
So just understand that when Dave is talking about home ownership rather and getting into the process, there is a direct correlation to his financial Pocket book in the idea of working with a professional and working with his network. Josh, what are your thoughts on that?
[00:44:23] Josh Lewis, Certified Mortgage Consultant: Dave may actually be the highest paid realtor in the United States when you realize how many little chunks he’s getting across so many transactions.
[00:44:31] Jeb Smith, Huntington Beach Realtor: Yeah,
[00:44:31] Josh Lewis, Certified Mortgage Consultant: Because he is so popular. He makes a great point here. In the US, unless you change the system, the way it works is a seller lists their home and they agree to a commission and then the listing broker is going to cooperate with the selling broker and share that commission.
So to you, unless you have completely turned this system over and come up with a new system, it is already accounted for in the transaction and the listing price. So you are getting that covered. And most importantly, people think or will [00:45:00] say, oh, realtors are overpaid. What do they do to make that commission? You’re working with the wrong realtor.
I can tell you at least 80% of realtors are just as bad as you think. That top 10, maybe top 20% will earn all of their money back in dollars over and over and are well worth that price. Even going back to what Jeb said earlier, how many times he’s been able to get the home warranty company cover a big, major expense that they did not want to cover.
If you’re working with your Uncle Joe, who got his license 20 years ago and has done four transactions, he has zero pull with that company. And that’s just one of a hundred examples. So again, there’s no cost to it until the system gets a massive overhaul and there can be massive benefits. The thing that’s incumbent upon you is making sure you are getting with one of those top 10 to 20% realtors.
[00:45:46] Jeb Smith, Huntington Beach Realtor: And that said, working with a professional, if you’re watching this on video, you’ve probably seen me on my phone half this episode, returning text messages and talking to clients that are actually in the process of doing disclosures and they have questions about the process. As a professional, yeah, I’ve allotted time in my schedule not to have to deal with that, but it’s important to me, right? They’re important to me. Getting their answers are important to me because they rely on me. And so you need that person that you can rely on like my clients are relying on me in the middle of this episode.
So Josh, I know Dave talks about 30 year fixed mortgages and I don’t know a lot of detail about loan programs that he promotes. But what are your thoughts on having the right loan program?
[00:46:29] Josh Lewis, Certified Mortgage Consultant: Very simple, very vanilla. Dave says, know which mortgage option is right for you? And what that means is it a 30 year fixed or a 15 year fixed? He pushes the 15 really hard, but those are the only two options in his world.
We went back, we talked about VA is zero down. USDA is zero down, FHA three and a half percent down. He and I agree that he’s very anti down payment assistance program because for the most part, it’s not free money you’re paying extra for the honor of someone giving you some money at closing.
But all of those options need to be considered, especially when you’re doing less than 20% down. It is important to do a side-by-side comparison of all of the loans that you could potentially qualify for, so you can see and quantify the differences and determine which one is best for you above and beyond just a 30 versus a 15.
For most people, I will say a 15 is not even an option, even though he aggressively promotes it. Ran a simple example. $400,000 loan today, a 30 year at 7% is $2646, a 15 year at 6% six and a half percent is $3466, so $800 more per month. Most people, that’s not an option. It will keep them from qualifying and it certainly saves you a ton of money in cutting that loan term in half, but it’s a 31% premium in the monthly payment.
Even if you could do it and you could qualify, as long as you are disciplined and can save and invest, I would recommend making a voluntary additional principal payment of $800 a month to give yourself the optionality and the flexibility of making a smaller payment if something were to happen, if big expenses come up.
Or if you’re comfortable with [00:48:00] investing, I would say take the $800 and invest it. And if you get the seven, 8% long haul return in the stock market, you are going to arrive at a freedom point where that extra $800 will allow you to pay it off in say, 10 years, 11 years, 12 years, much sooner than the 15 year. Another thing to consider, those aren’t the only options. You can do a 20 year loan, a 25 year loan, you may not have the interest rate savings, but you won’t be locking yourself into as high of a payment.
So I absolutely agree with Dave, you need to know your mortgage options. There’s just a lot more options than he would have you consider.
[00:48:33] Jeb Smith, Huntington Beach Realtor: While you were talking about that, I did a quick calculation. So earlier we talked about him using 25% of your take home pay towards your budget. Earlier we said, a hundred thousand dollars probably breaks in breaks down to about 1750.
We ran payments on a $400,000 home at 7% using a 30 year fixed, and that was $2,661. So almost $900 more than your budget on a 400,000 home. When you go to a 15 year, That payment goes from $2661 to $3595. So almost a thousand dollars more per month by doing a 15 year fixed mortgage. So if you’re hard and fast, Dave I’m taking everything he says to heart and I’m gonna do it. You’re never going to own a home.
The majority of you aren’t. And that’s what we’re talking about here when we’re talking about the idea of Dave Ramsey keeping you broke. But Dave says one more thing, Josh. He says it all the time. And he says, make stupid hard. So what is he talking about when he is talking about making stupid hard?
[00:49:33] Josh Lewis, Certified Mortgage Consultant: In the context of home ownership, what he’s saying is making additional principal payments or a chunk payment, 10, 15, $20,000, Aunt Pearl leaves you $50,000, pay that mortgage down, work on getting completely debt free. So what he considers that is we’re going to get a return on that money. It’s forced savings. And he’ll go so far as to say it’s a savings account and if you need it, you can access it.
It is hard and it is expensive to access money in your home equity versus money sitting in an investment account. So if you are completely undisciplined and are worried that you’re gonna burn through all of that money on vacations and fancy steak dinners, his advice is good. It will keep you from going broke.
If you’re disciplined and know how to invest, I would absolutely tell someone to lean towards saving, and investing the money, versus paying down a mortgage for the exact same reasons that we just went through in the 15 versus 30 years. So is it terrible advice? No. It’s overly conservative and it’s not applicable for most people who are grown up adults and can save and invest their additional funds.
[00:50:42] Jeb Smith, Huntington Beach Realtor: With that said, gonna leave you with our little motto here: Buy Right, Borrow Smart, Build Wealth.
Until next time, Adios!
[00:50:50] Josh Lewis, Certified Mortgage Consultant: Amigos.
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