My fiancée and I want to make an offer on a house. She has a lot of late payments and a bad credit record, though, but she is working hard to manage her money better and get out of debt. I don’t make enough money to get a home loan by myself, and I have some debt to pay off, too. In order to help us out, my aunt and uncle said they are willing to co-sign a mortgage loan for us. What do you think of that idea?
Here’s a simple, solid piece of advice for anyone looking to make a purchase of any kind. If you need a co-signer, you’re not ready to make that purchase—period. I’m not trying to beat you up or anything, but it’s way too soon for you two to be thinking about buying a home. I mean, for starters, you’re just engaged right now.
When a lender requires a co-signer, it basically means they don’t believe that you’ll pay back the money. And besides, you two don’t need a house now or right after you get married. The two of you should get married and live in a decent, inexpensive apartment for a while. During that time, you both need to work hard on paying off all of your debt. After that, save up an emergency fund of three to six months of expenses. Then, start setting aside cash for a down payment on a modest home.
When it comes time to buy a home, I recommend a 15-year, fixed-rate loan with a down payment of at least 10 percent. Twenty percent is better, because it will help you avoid having to pay PMI (private mortgage insurance). Make sure the monthly payments on the loan are no more than 25 percent of your combined take-home pay. Keeping the payments at 25 percent or below will make it easier to address other important financial issues, like saving and investing.
Your aunt and uncle are obviously generous people, Evan, but they’re a little misguided in their offer. At this point, helping you two buy a house—something you obviously can’t afford—would be a huge burden instead of a blessing.
Dave Ramsey is CEO of Ramsey Solutions, host of The Dave Ramsey Show, and a best-selling author, including “The Total Money Makeover.” Follow Dave at DaveRamsey.com and on Twitter @DaveRamsey