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Does the 30% Rule Still Work for Home Buying?

30 percent rule buying homes

When it comes to purchasing a home or condo as a primary residence, you may have heard the long-tenured “rule of thumb” about allocating no more than 30% of your income toward a mortgage, but in this changing economic time, and with the variability of the real estate market, does this old adage still ring true? The simple answer is yes, in most cases, but many lending experts suggest using the 30% budget more as a recommendation than a rule. 

First-time buyers, and even those who have bought and sold multiple properties, generally know that when it is time to make a real estate purchase, deciding on a budget should be the first step. While looking at photos on the internet and in-person tours are the more interesting and exciting aspect of the home search process, it's not necessarily productive to view potential properties prior to knowing how much you can actually afford. Simple budgeting involves making a spreadsheet or writing down all of your income sources and all of your recurring expenses and calculating the difference between them, in order to identify the amount of money you will have monthly and annually toward a home purchase. This number will give you an idea of how much income is unaccounted for each month, and will factor into your decision to follow the 30% status quo. Let’s look at an example:

If your annual gross income is $50,000, then that would be a gross income of roughly $4,167 per month. Now 30% of that number is $1,250 - meaning that if you followed the 30% rule, you would only have $1,250 per month to spend toward not only mortgage, but also other home expenses including property taxes, homeowners insurance, and potential PMI or HOA costs. So in this scenario, that $1,250 is going to need to stretch a long way to remain within your budget, and buyers in this range may decide, or even need, to budget a higher percentage of their income toward housing expenses. On the other hand, if a homebuyer’s gross income is $500,000 annually, the 30% benchmark gives a buyer $12,500 monthly towards housing expenses. A person in this income bracket may not need that full budget, but they also may feel more comfortable spending above that range if their expenses do not use a good portion of the other 70%  ($29,167) of total monthly income.

The above two examples are a bit exaggerated, but should give you a general rationale for why the 30% rule or recommendation can come down to a matter of personal comfort level. Once you’ve assessed your own financial situation and spending habits, and potentially spoken with a financial advisor or lender, you will be better equipped to begin searching for property that will work for your budget. If you have any questions about the home buying process in Florida, or if you would like to work with a knowledgeable lender to assist with your purchase, please contact us. We are here for you 100% of the time!

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