Lesson P201.8 · Personal Finance 201: Build Wealth
Rent or buy a home
5-minute read · Figures checked October 2026
Photo: Thirdman / Pexels, Pexels License
The short answer
Renting is not wasting money when the rent fits your budget. Buy when your consumer debt is gone, your emergency fund is full and the payment fits. Dave Ramsey's guideline is a payment at or below 25% of take-home pay on a 15-year fixed loan. If you're self-employed, lenders go by your tax returns, so your income has to show up there.
When buying makes sense
Buy when three things are true:
- Your consumer debt is gone.
- Your emergency fund is full, and it stays full after closing.
- The whole payment fits your budget.
Ramsey teaches the same starting point: be debt-free with a full emergency fund before you buy. Until then, rent gives you a place to live with no repair bills and room to finish your other goals. It also fits if you might move for work.
What the payment includes
Ramsey counts principal, interest, property taxes, homeowners insurance, private mortgage insurance (PMI) and HOA fees, and keeps the total at or below 25% of take-home pay.
Example (made-up numbers): Lena and her husband take home $5,600 a month. A quarter of that is $1,400, so everything on that list has to fit inside $1,400 a month.
Costs beyond the payment
- Cash to close. That's the down payment plus closing costs. A lender's Loan Estimate shows both, along with the estimated monthly payment. The CFPB suggests getting Loan Estimates from several lenders and comparing them. Ask your state's housing finance agency whether it offers down payment help, and how its programs work with the loan you're choosing.
- Repairs. The furnace, the roof and the water heater are yours now. Set money aside for them every month.
- Taxes and insurance. Property taxes and insurance can rise after you buy.
- The emergency fund. Save the down payment separately so the fund is still full the day you get the keys.
Self-employed or paid by the job
Lenders verify income from your signed tax returns. Fannie Mae's guide for the loans it buys generally wants two years of self-employment history. Less can work if your latest signed returns show 12 months from your current business and earlier income at the same or higher level in the same or a similar line of work. Income you didn't report can't help you qualify.
Example: Mateo (example) ran crews as a sealcoating foreman for years, then went out on his own in January of last year. His latest return shows a full year of business income. Because he earned as much or more as a foreman, in work with similar duties, a lender may be able to count his business income under Fannie Mae's guide.
Two paths: keep renting or buy now
Two ways to go
Keep renting for now, or buy a home now?
Conservative path
Keep renting
Rent while you clear consumer debt and fill the emergency fund, and save the down payment separately.
- Cash
- Rent each month, with no repair bills and no cash to close.
- Risk
- Rent can rise, and you build no equity in a home.
- Time
- Buying waits until your debt is gone and the emergency fund is full.
- What goes wrong
- The waiting has no plan, and the down payment fund stays where it started.
Bolder path
Buy now
Buy with a payment that fits the budget, using Loan Estimates from several lenders.
- Cash
- Cash to close (down payment plus closing costs), then a payment that includes principal, interest, property taxes, insurance and any PMI and HOA fees, plus money set aside for repairs.
- Risk
- The furnace, roof and water heater are yours, and taxes and insurance can rise after you buy.
- Time
- A lender verifies income from your signed tax returns, and self-employed buyers generally need two years of history.
- What goes wrong
- Closing empties the emergency fund, or the payment doesn't fit a slow season.
When each fits
Renting fits while consumer debt remains, the emergency fund isn't full, or you might move for work. Buying fits when the debt is gone, the emergency fund stays full after closing, and the whole payment fits your budget. Ramsey's guideline is a payment at or below 25% of take-home pay on a 15-year fixed loan; other educators and most lenders accept a 30-year fixed or government-backed loan when the payment fits.
Different approaches
Where respected teachers differ
Mortgage type and term. Ramsey recommends a 15-year fixed conventional loan with a payment at or below 25% of take-home pay, 20% down if you can (as little as 5% for a first home, with PMI), and avoiding FHA, VA, USDA, 30-year and adjustable loans. Other educators and most lenders accept a 30-year fixed or a government-backed loan when the payment fits the budget. A HUD-approved housing counselor can walk through your numbers, often at little or no cost.
Pay off the house early or invest. Ramsey's Baby Step 6 is paying off the home early, after investing 15% and saving for kids. Others prefer investing the extra when the mortgage rate is low. Run both with your numbers.
Your Move
Do this week
- Write your monthly cost of renting: rent plus renters insurance.
- For a home you'd consider, write the full monthly cost: principal and interest, property taxes, insurance, PMI, HOA and a monthly repair amount. Compare it with 25% of your take-home pay.
- Add up cash to close and moving costs, and check that your emergency fund would still be full afterward.
- Book a session with a HUD-approved housing counselor, often at little or no cost: 800-569-4287.
Log it: Rent versus buy run.
Common questions
Is renting throwing money away?
No, not when the rent fits your budget. Rent pays for a place to live without repair bills and leaves room to finish your other goals.
How much house can I afford?
Dave Ramsey's guideline is a payment at or below 25% of take-home pay, counting taxes, insurance, PMI and HOA, on a 15-year fixed loan. Other educators and most lenders accept a 30-year fixed or a government-backed loan when the payment fits; see the box above.
Can I get a mortgage if I'm self-employed?
Yes, with your income on your tax returns. Fannie Mae's guide generally wants two years of self-employment history and in some cases accepts 12 months.
Watch out for
- A pre-approval bigger than your budget. Let your budget set the price; the approval letter only shows the most a lender will lend.
- Draining the emergency fund for the down payment.
- Skipping the home inspection to win a bid.
Free help
- HUD: Find a HUD-approved housing counselor, 800-569-4287
- CFPB: Find a housing counselor
- National Council of State Housing Agencies: State housing finance agencies, to find your state's agency and ask what it offers
- CFPB: Loan Estimate explainer
Free practice
Lesson check
5 questions on this lesson, one at a time, with the answer and the reason after each. Pass with 4 right, including every must-know question.
This is general education, not tax, legal, investment or insurance advice. Rules change and every situation is different. Check the sources below, and talk to a qualified professional before you act on it.
Sources
- Ramsey Solutions: How much house can I afford? (checked October 11, 2026)
- Ramsey Solutions: Dave Ramsey's 7 Baby Steps (checked October 11, 2026)
- Fannie Mae: Selling Guide B3-3.5-01, self-employed borrowers (checked October 11, 2026)
- CFPB: Loan Estimate explainer (checked October 11, 2026)
- National Council of State Housing Agencies: Housing help (checked October 11, 2026)
- HUD: Housing counseling (checked October 11, 2026)
- CFPB: Find a housing counselor (checked October 11, 2026)