Ramit Sethi Says You're Not Ready to Buy a House if You Don't Have This One Thing

Saving for a home is hard, but owning a home can be harder.

Ramit Sethi is a popular personal finance guru and the guy behind the successful blog, I Will Teach You To Be Rich. Part of what has made Sethi popular is that much of his advice goes counter to the mainstream. Instead of encouraging tighter budgets, less spending, and at-home coffees, Sethi instead promotes boosting your income -- and buying all the lattes you want.

That said, there is some of Sethi's advice that is right in line with other experts, especially when it comes to buying a house. For example, he is a big proponent of keeping a firm housing budget that doesn't exceed 28% of your income. He also believes you shouldn't even consider buying a home until you have one important thing: a big down payment.

20% down -- minimum

The question of how much money to put down on a new home is one of the most common new buyers ask. At the low end, it's possible to get a mortgage loan with a down payment as low as 3.5%, or even less in some cases.

But there's can and then there's should. In Sethi's opinion, you should aim to have a down payment of at least 20%, if not more.

In general, experts recommend a minimum 20% down payment because that's the minimum threshold you need for most mortgages to avoid private mortgage insurance (PMI). PMI is insurance on your loan that protects the lender's investment; think of it as the lender hedging their bets.

PMI can run as high as 2.25% of your loan value, depending on your credit, loan amount, and debt-to-income ratio. This can add a substantial amount to your monthly mortgage payment.

Forming good habits

While avoiding PMI is ideal, it's not the only reason Sethi thinks you should wait until you have a 20% down payment. It's also about developing good saving habits.

"The real reason to save 20% before buying is counterintuitive," he writes on his site. "Building the habit of saving is critical before you buy and have unexpected housing expenses such as a broken water heater, roof, or unexpected taxes."

Given the average cost of a house these days, saving for a 20% down payment can take years -- or longer. But that, Sethi says, is the point.

"I frequently get frustrated comments about how 'impractical' this rule is. 'How am I supposed to save 20%? That will take years!' Yes, it will. Which is exactly why you should save now. Saving is a habit, which is better practiced before your mortgage is at risk."

In other words: If you can adopt the discipline to save every month towards your down payment, it's that much easier to keep saving even after you buy your home. This will help you cover the unavoidable costs that are a part of owning a home.

The hard truth is that owning a home is expensive. That's one reason some people are actually better off renting. Mortgage payments are just the tip of the iceberg. You also have to deal with maintenance costs, insurance, inevitable repairs and appliance replacements -- and so on. The better you are at saving before you buy a house, the better off your finances will be as a homeowner.