FinancialSamurai.com suggests three rules to follow when deciding on what house you can afford. These rules, known as the 30/30/3 home-buying rule, were developed during the 2009 global financial crisis and have since been widely promoted. Following these rules can help you remain financially disciplined and better withstand economic downturns.
Traditionally, it’s advised to spend no more than 30% of your gross income on your monthly mortgage payment — a slightly looser cousin of the 28% housing ratio (section “Housing Ratio (HR1)”). While lower mortgage rates may tempt you to exceed this percentage, doing so can be risky, especially for middle- to lower-income individuals. For instance, spending 40% of a $50,000 monthly gross income leaves $30,000, whereas spending 40% of a $5,000 monthly gross income leaves a much smaller cushion. Therefore, it’s safer to allocate a smaller portion of your monthly gross income to your mortgage if your income is lower.
Before buying a home, you should have at least 30% of the home’s value saved in cash or semi-liquid assets. This includes 20% for the down payment to avoid PMI insurance and secure the lowest mortgage rate, and an additional 10% as a financial buffer. Programs allowing smaller down payments exist, but a larger financial cushion is advisable during uncertain times. Homeowners with minimal down payments were the quickest to default during the last recession, missing out on subsequent real estate recoveries. If you plan to buy a home within the next six months, keep at least the 20% down payment in cash. Avoid investing this money in stocks or other risk assets if your home-buying timeline is short. If you lack the 30% savings, consider cutting expenses or starting a side hustle to boost your income. Borrowing from family is common, but ensure it doesn’t put them at financial risk.
This rule helps you quickly determine affordable homes. If you meet the first two rules, you can use this one to finalize your budget. For instance, if you earn $100,000 annually, you can afford a home up to $300,000. If you earn $500,000 annually, you can afford a home up to $1,500,000. If mortgage rates are declining and you expect your income to grow, you might stretch this rule to 5X your annual income. However, this means more absolute debt, higher property taxes, and increased maintenance costs. Always run the numbers before making a purchase. When mortgage rates run high relative to the long-run average, stick closer to the 3X end.
The Tier-1 paradox. The 3 ceiling is structurally unworkable in the coastal metros where many of this book’s readers actually live. A $500,000-earner in Santa Clara, San Francisco, west Los Angeles, Manhattan, or comparable Seattle, Boston, or Bay-adjacent submarkets cannot find an entry-level single-family home at $1.5M; the median price clears that easily, and the kind of property a top-bracket professional household will actually buy is well above it. The honest options are three: (1) deploy a disproportionately large down payment — routinely 40–60% rather than 20% — to suppress loan size and carrying cost; (2) accept that the rule is geographically misfit and underweight every other illiquid asset class in the portfolio to compensate (section “Housing’s Role in Optimal Portfolios”); or (3) rent and invest the difference until you can satisfy a relaxed but still disciplined multiple, say 4–5, on a property you intend to hold for at least a decade. The wrong answer is to stretch the multiple, accept the standard 20% down, and convince yourself the appreciation will bail you out.