Mortgage Guidelines: Dave Ramsey Under Fire
Remember AM radio? Well, it was a thing. And a means to listen to the Dave Ramsey Show during my upbringing. Ramsey’s advice was the first financial advice I heard outside of the home.
His advice was simple. Recommendations that sounded reasonable. Things like being debt free and spending less than you make. Invest along the way.
As time passed and I began researching personal finance for myself, I continued to agree with the bulk of his advice, but had some notable changes along the way. Most of these differences applying to high-income professionals who find themselves in a scenario different from the average bear.
As far as battling debt or a generic starting point, the Ramsey Solutions package is a reasonable choice. This blog entry isn’t about my feelings towards the Ramsey practice paradox or his baby steps, but rather his guidelines on buying a house as a personal residence.
Under Fire
Recently I read an article criticizing Ramsey’s house buying guidelines. This author spoke to the unrealistic aspect of his guidelines, which we will examine shortly. He said the world is different and Ramsey needs to come to terms with reality. This interested me to read on and examine the situation for myself.
I genuinely can’t remember the article or author otherwise I would link the article.
For those of you who have my other posts on real estate as a personal residence, you know I’m not a fan of turning over personal residences regularly. And neither is Ramsey. His guidelines are the way they are for a reason. They fit the mantra. Ramseysolutions.com has all sorts of details regarding everything Ramsey if you want to check out more.
Ramsey is acutely aware of the mental and emotional aspects of personal finance. His house buying recommendations reflect this and are as follows:
TL;DR
It’s no fun being house poor.
Dave’s guidelines limit the average family to a $1,500 monthly mortgage payment.
Mortgage brokers are happy to lend more than you can handle.
Houses built in 1950 vs today are not apples to apples.
When to Buy a House
Ramsey recommends the following be accomplished prior to taking the leap into home ownership. As he says, owning a home can be a blessing and a curse.
Be Debt Free
Have a 3-6 Month Emergency Fund
20% Down Payment or 5-10% for first-time home buyers
I like these. Achieving these milestones takes years for many. With the national average savings rate at 4.7%, it takes a long time to save this much.
Tough to follow for many CRNAs because of six-figure student loan debt. Graduate around age 30. Pay off loans over 3 years. Then another year for an emergency fund. Then save for a down payment.
By these guidelines, home ownership doesn’t arrive until age 40. Tough for many high-income earners to continue living this way when their peers may have been homeowners for a decade or more by this point. FOMO city.
And with the recent housing boom following COVID, everyone is talking about how great of an investment home ownership is. Another temptation to jump in before the water has reached an appropriate temperature.
I’ll analyze in a bit. Let’s continue with the Ramsey recommendations.
1. Limit Mortgage Payments to 25% of Net Income
That’s 25% of take-home pay. That 25% needs to cover PITI (principal, interest, taxes, and insurance) and HOA fees (homeowner association). All this using a 15-year mortgage, not a 30-year mortgage.
Many lenders will approve a monthly PITI payment of 28-36% of your GROSS income. This applies to a 30-year mortgage. We will look at the clinical differences in a bit.
2. Calculate the Mortgage Payment
Ramsey recommends using a 15-year mortgage to avoid having a house payment into retirement. Folks have the best of intentions to make extra payments, but it rarely happens. Ramsey wants a paid off house to compliment the debt averse system.
A 20% down payment is tough to save, but it lowers the monthly payment–right, a lower mortgage balance. If you have equity from a different house, roll that amount into the new buy and keep the payments low. That leaves money for other investments to concurrently grow your wealth.
First-time home buyers get a bit of a pass here. 5-10% is a reasonable number. Typical FHA loans will allow as little as a 3.5% down payment, but that increases risk. If the house value decreases, it doesn’t take much to be underwater.
3. Closing Costs
This is the part I found to be icing on the cake during my house buying experience. Allow for a 3-4% additional cost when buying for things like loan fees, realtor fees, taxes, and inspections. That’s an extra $12,000 for a $300,000 house.
Where Does the Beef Come In?
The average home price in the United States dipped to around $385,000. This obviously varies significantly from state to state.
The most recent data I could find suggests, the average family of 4 earns $74,000 annually. The following is from September of 2022 and shows how a family of 4 spends their dollars. Note the housing allotment, which includes all forms of housing.
For the sake of simplicity, the average net income is $6,000 per month.
25% of $6,000 = $1,500 per month.
Assuming a 6.5% interest rate, a 15-year fixed mortgage, and a 20% down payment of $32,000, the average family in the United States can afford a $160,000 house. Quite the difference from the average home price in the United States. That’s the beef.
With this disparity, I don’t think I need much explanation as to why this author felt the Ramsey recommendations were unrealistic.
If we stretch that same house to a 30-year mortgage, the rate jumps to 7%. The payment remains at $1,500 per month. The 20% down payment increases to $40,000. This allows for a $200,000 house. Slightly more house.
Well, what does that look like in some of the highest and lowest cost areas?
Still not great for the average family.
Fitting the Recommendations
What does the net income look like for someone buying that $380,000 house? PITI comes out to be $3,222 per month. Again, we have a 6.5% interest rate and a 20% down payment, which turns out to be $76,000.
This makes the required monthly NET income $12,888. This amount is the take-home pay for the average earning CRNA who grosses just over $200,000.
That’s a 2.7x increase for the average household income. Not doable.
Using these tight guidelines is a pretty safe way to avoid becoming house poor. Downside, it takes a while to get there. Upside, housing costs will be manageable.
Interest Rates Matter
To no surprise, that same payment on a $380,000 house with a 15-year mortgage costs far less at a 3% interest rate. The monthly payment shrinks from $3,222 to $2,673. Almost a 20% decrease in payment for the same house.
We I could play with mortgage calculators all day and look at what the interest would be over the life of the loan. That’s not what this post is about. This post is about an article disagreeing with arguably the biggest face in personal finance.
What Mortgage Brokers are Selling
This goes back to the PITI being 28-36% of gross income. For the average earning family of 4, this commonly used criteria puts the monthly payment between $1,726 and $2,220. This likely includes a 15% down payment, which is the average (8% for first-time buyers), and a 30-year mortgage.
A broker would pitch the family a $205,000 house with a $30,000 down payment all the way up to a $275,000 house with a $41,000 down payment.
These are far different from the $160,000 house recommended by Ramsey.
If you are an average earning CRNA, your broker would likely approve a $4,667 to $6,000 payment. That allows for a $610,000 house with a 15% down payment of $91,000 all the way up to an $800,000 house with a down payment of $120,000.
At risk of being annoying and repeating myself yet again, the range is far different from the house recommended by Ramsey.
Timeline
Referring to the average savings rate of 4.7%. Here is what a typical timeline looks like.
$74,000 * 4.7% = $2,960
Yep, $3,000 annually. That downpayment is looking pretty daunting at this pace. Just another reason to avoid being average and the mediocrity surrounding its execution.
The TFC Take
I despise the word “unrealistic.” It is commonly used in place of words such as “undesirable” and “uncomfortable.” It’s the difference between saying I can’t, and I won’t.
Can’t put away more than 5% annually, or don’t want to buckle down and make the changes necessary to put away more than 5% annually? On a CRNA salary, I don’t buy it.
Unrealistic speaks to overlooking the truth of the situation. Sure, home prices and mortgage rates are what they are. But we ignore changes of the past decades that made home prices and mortgage rates what they are.
I continue to believe housing to be the middle-class trap. Home ownership is a blessing to those who can afford it and a curse to those who overleverage to pretend they are someone special.
The U.S. Census Bureau reports the median square footage of houses increasing from 909 in 1950 to 1,595 in 1980 to 2,386 in 2018. During that time, the average family size decreased. I read during this time, average square footage per individual went from 250 sq. ft. to almost 900 sq. ft. Not to mention the amenities we have in current houses that were unavailable decades ago.
It bothers me to no end when statistics compare the average wage to average home price over the decades. Complete apples to oranges comparison.
We haven’t seen 8% interest rates since 2000, and 5% rates since February of 2011. Many of you reading this likely refinanced and have a fixed rate of 3%.
Money was really cheap and easy to borrow. This translates to rapid lifestyle inflation with minimal financial consequences. This only widened the disparity of comparison between the apples and oranges.
Wells Fargo released a statistic this week stating 59% of affluent millennials feel looking financially successful is important. This means there will be resistance to lifestyle deflation. This is a total Fun with Dick and Jane type moment. Funny movie. Bad deal with Enron though.
TFC Recommendations for CRNAs
I like the Ramsey guidelines. They prevent folks from being house poor and carrying a mortgage into their 70s. I don’t dislike housing as a personal residence, I just feel too much money is lost in the process.
Start the moneymoon phase with a bang. Aggressive out of the gates. This is the time. This sets the trajectory. This resets the standard. This unlocks potential.
Make short-term sacrifices even if they are inconvenient or unpleasant. I could throw out all kinds of cliché advice here because it works. Spend less. Work more.
Newly graduated CRNAs don’t want to do that. And I don’t blame you. Completing your education and becoming a CRNA is not an excuse to spend reclessless. As many of your coworkers can probably tell you, $200,000 per year can disappear pretty quickly.
Take a step back and look at the true cost of each and every dollar. Every dollar invested today will grow substantially by retirement. Each dollar spent today will be one less worker bee building your nest egg.
Just because you are a CRNA, you don’t need to impress anyone with your house. Mrs. TFC and I are currently living in a mix of hotels and short-term rentals. We aren’t impressing anyone despite the income we are bringing in.
Be careful with social media and societal expectations. Everyone runs their own race. And housing is a major piece in that race. So, make the housing decision that’s right for you.
