Buying a house was not all that complicated at one time. Back in the 1950s, a home mortgage cost only about $4,700. Now, though, a house is not only quite a bit more expensive but the market is also causing some undue stress on prospective homeowners.
Saving for a house is difficult, but it will always get you prepared well ahead of time. If you do happen to want to start a family, you do not want to get to that point and realize you have mountains of saving to do and can not afford the home of your dreams.
The best method out there is by far and away the 30/30/3 rule. We will run you through the rules so you know exactly how it works and can understand how much house you can afford, a critical part to beginning the house saving journey.
WHAT IS THE 30/30/3 RULE?
For most people, it can be awful trying to figure out the numbers yourself. You will inevitably find yourself doom scrolling through Zillow and try your best to convince yourself that, yes, you can afford that $700,000 house even though you only make $70,000 per year.
This is where having a rule in place helps immensely. The 30/30/3 rule is a 3-step process to figuring out exactly how much house you can afford. While we’re all human and not every set of rules will stick forever, if you at least follow one of the rules, you’ll give yourself a even a bit more of a realistic idea of how much house you can afford.
The first rule is do not spend any more than 30% of your monthly income on a monthly mortgage. This might have seemed high a little while ago, but house prices have been skyrocketing in recent months. This rule has been around for a while, though it makes more sense to plan for this and budget around 30% so you at least have enough to pay for day-to-day things as well.
Also, there was notably no mention of “gross” income or “net” income when calculating the 30%. The choice is yours. Just know that while 30% of your gross income may let you wiggle into a more expensive house, you also may have a bit less actual cash flow coming in every month for fun stuff, other savings, or investing.
The second rule is keep at least 30% of the home value saved up in cash before you buy a house. Personal finance gurus call this an “emergency fund.” This is the first time it’s noticeable that the rules must follow each other because you can’t really know what 30% of your house value is until you can figure out how much house you can afford in terms of monthly mortgage payments.
30% of a $250,000 house comes to $75,000 in savings, which is a lot of money. However, this 30% is meant to be saved before you buy, and it includes your 20% down payment (so you avoid that pesky private mortgage insurance) as well as a 10% buffer for house repairs and such which will come up at some point.
The last rule is the total price of the home should be no more than 3 times your annual income. You hate to limit yourself, especially after that Zillow session you just had and saw at least five of the perfect houses that are just outside the limits. However, bear in mind that this last rule will just help you get into a house, grow some equity, and start preparing for the next one.
We mentioned limiting yourself is not much fun, but remember that once you get that house after you have confirmed it meets the rules, you will find it very quickly becomes your very own space, designed just how you want it, and it’s your home. You don’t need to be in that mansion you saw on Zillow because, let’s be frank, that house comes with far more maintenance and taxes than you want to wrap your head around. These rules will help you get into a home that meets your budget and lifestyle. Then, you can focus on making it your dream home.