What is the 30 30 3 rule? In a nutshell, it is the best-practice financial ratio for low-risk home buying. Lenders worldwide have thousands of rules and criteria that help homeowners navigate the realm of mortgage financing. How much do you need for a down payment? What’s my minimum credit score or debt-to-income ratio? How many consecutive years must I be in the same career to prove my work history? You are not alone if you find yourself questioning many of these topics. There is a basic rule that helps ensure you are prepared for the personal finance requirements for buying a new home. Whether you are a first-time home buyer or just looking to understand the best rule of thumb for home buying, we can answer your questions and connect you with a mortgage lender that can help you fulfill your dream of homeownership.
The 30 30 3 rule broken down:
#1 You should spend no more than 30% of your gross income on a monthly mortgage payment.
To understand the 30 30 3 rule you must first calculate the gross annual income of yourself and any other party that will be on your home loan. Once you have calculated 30% of your gross household income, divide that number by twelve. This is the maximum recommended monthly mortgage payment you should consider. You want to ensure the affordability factor of this financial commitment. Homeownership comes with surprises. The world recognized that throughout the pandemic. Suddenly, what felt affordable can become a real burden when life surprises you with an unexpected home repair or a decline in income. For this reason, the 30% rule allows for a cash buffer just in case you need it.
#2 You should have at least 30% of the home’s value saved up in cash or low-risk assets.
Now for the hard part, keeping that wallet closed. We recommend using this time to stay consistent on every payment you make. Whether you have credit card debt, student loans, or housing costs, keep your payments on time and work to increase your credit score and lower your debt-to-income ratio. Above all else, try to live with a little less and save a little more. As long as your basic needs are covered, every dollar you save pushes you closer to your goal of owning a home. This is the time to push yourself harder to achieve your goal. Passive income options are beneficial, use the stock market and get going on that side hustle. Do all you can to grow your money.
Essentially, the best rule of thumb is 30 percent of the property value saved; however, a good lender can help you find alternate options if you are close but need some help with a down payment Add a link to What is the minimum down payment for a house. There are options for down payment assistance, gifts from family or friends, and many alternatives to saving 30% on your own. You wouldn’t be the first homeowner to access funds from the Bank of Mom and Dad, so if you’re close to that 30%, don’t be too shy to ask your family to help. Real estate is generally an excellent investment, so the discipline of saving money is almost always with it.
#3 Understand your risk, and buy a home valued at no more than three times your annual household gross income.
One of the first financial commitments you will make is becoming disciplined enough to be realistic as to how much house you can afford and save enough to make that home purchase. By not exceeding 3% of your annual household gross income, you will ensure you have a financial cushion and lower your risk of foreclosure. Home price is only part of the equation. The goal for borrowers is to get into a home with a loan amount they can afford. Determining your price range is a relatively simple process. Partnering with a lender you trust will enable you to find the lowest mortgage premiums. They can guide you through many of the confusing financial factors of lending, like mortgage rates, private mortgage insurance PMI), property taxes, and closing costs and fees associated with the home-buying journey.
”Spend no more than 30% of your gross income on a monthly mortgage,” -Sam Dogen, Founder of Financial Samurai.
By understanding the 30 30 3 rule, you will set yourself up for efficiently navigating the home buying process. A good financial plan ensures that your monthly income can carry you beyond simply meeting your housing costs. The rules may seem like a lot of work, especially considering all of the options for lower down payments; however, it is well-advised to have a larger financial cushion during times of uncertainty. Owning a home is one of the most significant achievements in our entire life. Your dream home is out there, and you are about to make it a reality. “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” – Andrew Carnegie
Now that you understand the 30 30 3 rule, let’s connect you with the people that can help
Your home plays a significant role in financial security. So, regarding your mortgage loan, you want to be sure you’re making responsible decisions. Undoubtedly, the 30 30 3 rule and loan process invokes insecurity in many people. In particular, navigating through a sea of paperwork and financial jargon can be unsettling without honest guidance. In fact, a lack of clarity can lead you down the wrong path and compromise your financial future.
You deserve to work with a lender who brings clarity and has your best interest at heart. Whether you are looking to purchase a home, help with refinancing, lower interest rates, or specifically ensure that you have made the best decision for the life of your loan, Mortgage Insider can help you after helping thousands of families reach their goals to create stronger financial futures.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insider will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
