Aug 4, 2023
There are times when homeownership may not be for everyone — even for those who really want one. Just ask a Knoxville, Tennessee-area school teacher who recently received some tough advice from The Ramsey Show after he called in seeking counsel about how to buy a home on a $60,000 annual income in a real estate market where homes routinely fetch $300,000 or more.
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The hosts repeatedly reminded James of the dreary math that’s working against him and suggested he consider an inexpensive townhome or push his home search further away from his job to find something cheaper. He could also wait until he’d cleared “Baby Step 2” — the second rung on the Ramsey ladder in which adherents start paying down their debt.
The anchors were sympathetic but blunt: “Being a world-class teacher in a great part of the country doesn’t change the math of ‘I wanna own a home.’”
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The hard-to-hear truth
The show’s skepticism over James’s readiness rests on Dave Ramsey’s rule that no more than 25% of one’s take-home pay should go toward a mortgage. Anything more than that, Ramsey believes, is an overextension that risks your financial health — especially if you have debt. (Remember, too, another key tenet of Ramsey’s home-buying philosophy: Put at least 20% down to remove the cost of private mortgage insurance.)
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James could also change careers to better afford the home he wants — another demoralizing option. One of the show’s hosts had a sharp message for politicians about compensating civil servants like the caller: “To all you legislators who are just throwing sand at each other in your sandbox, pay teachers and cops. … Good grief.”
Regardless of career path, the 25% figure is usually a good rule of thumb, though the lending industry typically recommends no more than 28% as the ceiling. Here’s why James and others in his situation might reconsider their goals and timelines.
More: How much house can you afford?
Financial strain
A primary risk of buying a home with a mortgage above 25% of your take-home pay is the potential for severe financial strain. Your mortgage payment is only one aspect of your overall housing costs, which also include property taxes, insurance and maintenance. Overspending on your mortgage reduces room in your budget to cover these additional costs and meet other financial obligations.
This lack of financial flexibility can restrict your ability to save for emergencies, invest in your future, or enjoy discretionary expenses. Add medical emergencies or job loss into the mix, and things can get out of hand fast.
Read more: A California nurse went viral showing how she paid off her student loans by 27 while making up to $500K a year — here are 5 ways to build wealth without a wild salary
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Risk of default
In the event of an unforeseen financial setback, you may find it challenging to keep up with your mortgage payments.
Defaulting on your mortgage can have long-term consequences, including damaged credit, foreclosure, and the loss of your home. And it may only land you in a cycle of debt.
A report by the Federal Reserve found that higher debt-to-income ratios were commonplace in cities that endured the worst of the 2008 recession.
Reduced mobility and flexibility
An overextended mortgage can limit your mobility and flexibility in life. If you’re tied to a high mortgage payment, it becomes more challenging to seize new job opportunities or relocate for personal reasons.
This lack of flexibility can hinder career growth and personal development, trapping you in a situation where your mortgage becomes a burden rather than an asset.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
