My parents are letting us pay them for their $340,000 house on my $75,000 a year salary and Dave Ramsey thinks I’m crazy

A caller to the Dave Ramsey Show shared an interesting dilemma recently– and Ramsey was not too happy with the decisions he had made.

The caller and his wife wanted a bigger home, and his parents agreed to sell him their house at a discounted rate of $340K when the market value was closer to $380K. 

Unfortunately, while it may seem like a good deal on the surface, the way the deal was structured has Ramsey referring to the situation as a “disaster,” and telling the caller he made a big mess. Here’s why Ramsey believes the caller and his wife made a big mistake.

A desire for a bigger home leads to bad financial choices

Ramsey had multiple issues with the decisions that the caller had made.

First and foremost, the caller indicated that he had not officially purchased the home. He and his parents had agreed on a price, and his family was living in the house, but the parents still held a mortgage on it, and the house was still in their name.

The caller was paying the parents’ mortgage, though, which still has a $90,000 balance on it. He told Ramsey he was paying $2,000 a month despite having take-home pay of only around $6,000 a month. This monthly cost was a big source of concern for Ramsey, because Ramsey thinks that the payment is too high given how much the caller makes.

The bigger issue, though, was that the caller had no money for a down payment to actually purchase the home from his parents and to get his own mortgage. In fact, he has $30K in debt and around $3,000 in savings. Since you can’t just get a mortgage on a home with no down payment, the caller would simply be paying his parents for a house he had no real ownership claim on. 

The problem, as Ramsey explained, is that if something happened and the parents ended up getting sued, then the lien would go on the house and the caller would have no recourse.

He is essentially a renter, according to Ramsey, but he’s paying way more in rent than he can afford and there’s no real solution to get out of the situation other than trying to aggressively save up a down payment to get the old mortgage off and get a new loan and get his name on the house — or to try to find a mortgage lender who is willing to let the parents gift him equity to serve as a down payment. 

Don’t make mortgage payments on a house you don’t own

Ramsey is absolutely right that it is a terrible idea to make mortgage payments on a home that you don’t actually own because you have no right to any of the equity in the house.  Ramsey is also correct that spending too much of your monthly income on a house is a bad move.

Unfortunately, the poster is most likely in even worse shape than it initially appears because mortgage rates are still pretty high right now. When he goes to buy the house and get a loan for it, he could very well find himself paying even more than the $2,000 he’s paying now.

In fact, even if his parents gift him the $40K in equity and that counts as the down payment, buying a $380K house with a $340,000 30-year mortgage at 6.73% would come with a monthly payment of $2,203.65, not including taxes and insurance costs. This is likely way above what the poster can afford with his $6K in annual income. 

Ultimately, the caller should have talked with a financial advisor before making this decision to avoid the mess he’s found himself in, and he should likely talk with a financial advisor now to explore all of his options for getting out of it with his finances as unscathed as possible.

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