Mortgage Loan Do's and Don'ts
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Key Takeaways
- Get a 15-year fixed-rate conventional mortgage with a payment that’s no more than 25% of your take-home pay—including principal, interest, property taxes, home insurance, private mortgage insurance (PMI), and homeowners association (HOA) fees.
- Before you apply, be debt-free with a full emergency fund of 3–6 months of expenses and have a down payment saved (ideally 20% to avoid PMI—an insurance that doesn’t benefit you).
- Skip ARMs and FHA or VA loans—they pile on risk, fees or a mortgage insurance premium (MIP) you could carry for the life of the loan depending on the size of your down payment.
- Once your loan is in underwriting, don’t open new credit, finance a car, or change jobs. Any of these could cause problems at closing.
- Try our Mortgage Calculator to see how different down payments and home prices affect your 25% limit before you talk to a lender.
Feeling overwhelmed about your mortgage options? No wonder! You’ve got plenty of choices when it comes to financing the purchase of your home, and it can be hard to know which one is best.
Quick Answer
The most important mortgage do’s are to save a 20% down payment and choose a 15-year fixed-rate mortgage with a payment that’s no more than 25% of your take-home pay. The most critical don’ts: Don’t take on new debt, make big purchases, or change jobs while your loan is being processed. Any of those can wreck your approval before closing.What Should You Do Before Applying for a Mortgage?
Before you apply for a mortgage, you should be completely debt-free (Baby Step 2) and have a full emergency fund of 3–6 months of expenses (Baby Step 3). You should also have a big down payment saved up (Baby Step 3b)—at least 20% so you can skip PMI, but 5% is okay for a first-time home buyer. That’s what makes a home a blessing instead of a burden.
If you want help tackling any of those steps, download our EveryDollar budgeting app.
Which Mortgage Types Should You Avoid?
The mortgages you should avoid include adjustable-rate mortgages (ARMs), FHA loans and VA loans.
Should you get an adjustable-rate mortgage (ARM)?
An adjustable-rate mortgage is one of the worst options out there because it transfers the risk of rising rates from the lender to you. A low interest rate sounds pretty great, right? That’s how ARMs hook home buyers. They offer a low initial rate, but after a designated period, the rate fluctuates for the remainder of the life of the loan. Do not finance your home with an ARM.
Should you get an FHA loan?
No—you should skip FHA loans. FHA loans are another popular mortgage option, designed specifically for first-time home buyers. They make it easier for first-time buyers to make the leap to homeownership by requiring as little as 3.5% down. Plus, these loans are backed by the government, which means the government insures the lender so it won’t lose its money if you don’t make your payments. What’s the downside? You’re required to keep a mortgage insurance premium (MIP) for the life of the loan if your down payment is less than 10%.1 MIP adds to your monthly payment, and it doesn’t go toward paying off your mortgage. That’s a cost you can do without!
Should you get a VA loan?
No—a VA loan isn’t the way to go, either. VA loans are a great idea in theory. They were designed to make it easier for our country’s military veterans to purchase homes, but the program falls short in practice. VA loans are backed by the Department of Veterans Affairs and allow veterans to purchase a home with practically no down payment.
When you buy a home with nothing down, a slight shift in the market could mean you owe more than the market value of your home. That’s a recipe for disaster because it could leave you stuck in a home until the market recovers. VA loans also charge a funding fee that can add thousands to your up-front costs.
What Are Ramsey’s Mortgage Do’s?
The only mortgage you should get is a 15-year, fixed-rate conventional mortgage with a payment no more than 25% of your take-home pay. Any more than that will tie up too much of your income and slow your progress through the remaining Baby Steps.
Do not get a 30-year mortgage! A $175,000, 30-year mortgage at 6.5% interest will cost you around $132,000 more over the life of the loan than a 15-year mortgage at 6% interest will. That’s a lot of money you could use to build up your retirement fund or save for your kids’ college.
One of the best places to start your house hunt is with our free Mortgage Calculator to get a better idea of what you can afford.
What Are Ramsey’s Mortgage Don’ts?
While your mortgage is in underwriting (when your lender checks your finances to decide how risky you are and whether to approve your loan), don’t take on new debt, make large purchases, or change jobs. Any of these can disqualify you from the loan before you close. Underwriters recheck your finances right up until closing, so keep everything steady:
- Don’t open new credit cards or take out any new loans.
- Don’t finance or buy a car.
- Don’t change jobs or quit your job.
- Don’t make large, undocumented deposits into your accounts.
Keep your income and bank accounts right where they are until the closing papers are signed. A single change to your finances can be the difference between getting the keys and getting denied.
Mortgage Do’s and Don’ts at a Glance
|
Do |
Don’t |
Why |
|
Get a 15-year fixed-rate conventional mortgage |
Get a 30-year loan, ARM, FHA, or VA loan |
You’ll pay far less in interest and fees and own your home years sooner. |
|
Keep your payment within 25% of your take-home pay |
Stretch to a payment that eats your budget |
You’ll have room in your budget to keep making progress on the Baby Steps. |
|
Put down at least 20% |
Buy with little or nothing down |
You’ll avoid PMI and start out with more equity in your home. |
|
Keep your finances steady during underwriting |
Open new credit, finance a car, or change jobs |
You’ll reduce the risk of screwing up your loan approval before closing. |
|
Be debt-free with a full emergency fund first |
Buy before you’re financially ready |
You’ll keep your home a blessing, not a burden. |
Here's a Tip
Your mortgage (principal and interest) isn’t your only housing cost. You also need to budget for property taxes, home insurance, PMI, HOA fees, and ongoing maintenance and repairs. Plan for these before you buy so a surprise bill doesn’t blow up your budget.
How Do You Find the Right Real Estate Agent?
Once you have your bases covered financially, go house hunting with an experienced real estate agent who will help you find a home that fits your budget. The agents in our RamseyTrusted® program understand how important it is for you to buy a home you can afford. You can trust that they won’t pressure you into a home deal that would bust your budget.
Next Steps
- Download our EveryDollar budgeting app to help you get debt-free (Baby Step 2).
- Set aside a full emergency fund of 3–6 months of expenses (Baby Step 3).
- Save a big down payment (Baby Step 3b).
- Get preapproved for a loan you can afford with our friends at Churchill Mortgage.
Frequently Asked Questions
Here are answers to some of the most common mortgage questions:
-
Can I get a mortgage if I have no credit score?
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Yes. You can get a mortgage through a process called manual underwriting. You’ll need to work with a lender like Churchill Mortgage that specializes in helping people who have lived debt-free and don’t have a FICO score.
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Should I buy a house with 0% down?
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No. Buying with 0% down leaves you with no equity and can put you underwater if the market dips. Ramsey recommends a 20% down payment to avoid PMI. If you’re a first-time home buyer who’s debt-free with a full emergency fund, a minimum of 5% down is okay to get started. Never buy with nothing down.
-
Does a preapproval letter mean I’m guaranteed a loan?
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No. A preapproval letter is an estimate from a lender, but the loan isn’t guaranteed until you pass underwriting. Keep your finances steady so you can make it safely through the closing process with no hiccups.
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Is a 15-year mortgage really better than a 30-year mortgage?
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Yes. A 15-year mortgage saves you tens of thousands of dollars in interest and lets you own your home twice as fast. The monthly payment is higher, but the total cost of the home is significantly lower.
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What should you not do while getting a mortgage?
-
While your loan is in underwriting, don’t open new credit, finance a car, change jobs, or make large undocumented deposits—any of these can sink your approval before you close. And don’t slide back into debt afterward, either.
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