How Much House Can You Afford? (Follow The 3-30-10 Rule)

How much house can I afford? There are the 2 major theories for finding out how much house you can afford

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Andrei Jikh

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How much house can I afford to buy? That's a very good question that has several different answers. The median household income in 2019 was the highest it’s ever been at $68,703. The most recent home prices data shows that in the second quarter of 2020, the median purchase price for a home was $313,200. That means people are spending roughly 4.5 times their yearly income on a home which is just about at the top of affordability scale. So the value of homes has been increasing faster and faster. There’s 2 major reasons for it.

The first reason is the supply. The last time we’ve had this low of an amount of homes for sale was in 2003. The second reason is because how low our interest rates are. They are lower than the real estate crash of 2008. In the last 50 years interest rates have been going lower. Now everyone can afford to buy more house. But how much money should you spend on a home and how much can you afford? There's 2 main answers:

First, take your monthly income, and multiply it by 0.28. Using myself as an example, I was making $50,000 a year before YouTube, that equates to about $4,167 a month. I would take that and multiply it by 0.28 which gives me roughly $1,167 a month. As long as my monthly payment doesn’t exceed that amount, I should be able to afford a house that falls within that range. That happens to be around 5x my yearly salary for a total home price of $250,000. If you want to have a higher chance of getting approved for a loan, the payment for your house, including your total debt - should not be more than 36%. This is called the DTI (debt to income ratio). Add up all the debts, including the mortgage, and divide it by your gross income. If the result is 36% or less, you should be able to get a loan.

The second method for calculating affordability is different than the first. This one uses the 3/30/10 rule for all the personal finance investor enthusiasts. You have to follow all three rules and if you cannot, you have to follow at least 1, otherwise you shouldn’t be buying the house even if you can technically afford it, you’re increasing your risk which is especially bad in times of uncertainty.

Rule #1 is 3. That means you should not be spending more than 3 times your annual income. So if you make $100k per year, in theory, you should not spend more than $300k on your home. I realize that this rule is extremely hard to follow if you’re living in a high cost of living area like San Francisco or New York City. In some cities across the US, buying a house for 3 to 5 times your annual income is impossible at this point.

Rule #2 states should have at least 30% of the home purchase price in cash. All this rule does, is lower our payment and tempt us away from selling if our homes lose value. That means to set aside at least 20% as a downpayment so you can get rid of the PMI which is called private mortgage insurance. This is something our lender forces us to buy into to protect their money from the risk of us defaulting or foreclosing - and for all intents and purposes - it’s literally throwing money away. You should also save the other 10% for random costs like repairs.

Rule #3 states you should spend no more than 10% of your gross income, that’s income before you pay your taxes on a mortgage. For the average person, it’s recommended to be around 28% but if your monthly payment can stay under 10% then you’re going to save and retire a lot faster. There’s really only 3 ways you’ll be able to do this. Either make a lot more money than the average person or buy a lot less house. Or you can do what I did and just rent a part of your house.

The perfect mortgage size for people to get into if you can afford it is $750,000. That’s because of something called the HMID - the home mortgage interest deduction which allows us to itemize and deduct mortgage interest paid on up to $750,000 worth of principal, on either our first and/or second home.

*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.