Buying a home can push your budget to the limit, and it’s tempting to cut corners to reduce upfront expenses. But one strategy that seems helpful in the short term may backfire.
According to financial expert Dave Ramsey, using a loan to cover your closing costs can cause serious problems, including extra debt, financial stress, and the risk of a delayed or denied mortgage approval.
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The hidden burden of closing costs
Buying a home involves more than just saving for a down payment. Closing costs, which include loan fees, appraisals, inspections, insurance, property taxes, and legal fees, typically range between 2% and 5% of the home’s purchase price.
A U.S. home priced at $403,700 could mean an additional $20,185 due at closing.
Many prospective homebuyers, caught off guard by these substantial costs, consider taking out a separate loan to cover them. According to Ramsey, this decision can create a cascade of financial problems.
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Why financing closing costs create financial trouble
According to Dave Ramsey, having enough cash saved to cover closing costs is more important than borrowing more at the last minute. Taking out a separate loan for these expenses can create many problems.
Adding new debt right before closing can mean:
- An extra monthly payment on top of your new mortgage
- More financial strain just as homeownership begins
- A temporary dip in your credit score due to the loan application
- Potential delays or issues with mortgage approval
Ramsey consistently advises that borrowing for closing costs increases risk and stress at a time when financial stability matters most.
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How added debt can disrupt your mortgage approval
Beyond the obvious burden of an additional payment, financing your closing costs can actually jeopardize your home purchase.
Taking out a loan to cover closing costs does more than add another monthly bill. It can also change your credit profile at a critical point in the mortgage process. Based on Dave Ramsey’s guidance, adding new debt right before closing can affect your credit score and cause your lender to re-evaluate your financial situation.
Mortgage approvals rely on the information available at the time of application. If your financial picture shifts before closing, such as through a new loan, your lender may pause or reassess the offer. This could lead to delays or even put the entire purchase at risk.
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A smarter approach to handling closing costs
While not always easy, the solution is straightforward: factor closing costs into your homebuying budget from the beginning.
With housing costs and mortgage rates already stretching many budgets thin, planning for the full expense of purchasing a home is crucial. This means saving for the down payment and accumulating enough funds to cover all closing costs without resorting to additional loans.
By building these costs into your saving strategy, you’ll avoid starting homeownership with an unnecessary debt burden that could snowball into more serious financial problems. Reduce other expenses where you can. Slash costs on dining, travel, eyeglasses, prescriptions and more with AARP — membership is just $15/year with auto-renewal. Join now and save hundreds.
Following Ramsey’s advice can help ensure that your transition to homeownership begins on a solid financial footing, rather than with the added pressure of more debt and financial strain that could potentially put your new home at risk.
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