So you want to buy a house? How much of your salary should you spend on your home?<\/p>\n
Conventional wisdom suggests that a person looking to buy a house should not spend more than 30% of their income on housing. But with home prices reaching new highs, that formula simply doesn\u2019t make sense for some.<\/p>\n
\u201cThe 30% rule, which holds that you should limit the size of your total housing payment \u2014 mortgage, taxes and insurance \u2014 to 30% of your monthly income, has never been a hard and fast rule,\u201d Sara Kalsman, a financial planner at Betterment, told MarketWatch. <\/p>\n
\n \u201c<\/span>The 30% rule, limiting your total housing costs to 30% of your monthly income, \u2018has never been a hard and fast rule.\u2019\u201d<\/span>\n <\/p>\n Consider a family earning $100,000 a year, who under the 30% rule, would have less than $2,500 a month to spend on housing after taxes. With the median home price in June at $426,056, according to real-estate brokerage Redfin Redfin estimates that a 30-year mortgage at a rate of above 7% may require a monthly payment of nearly $3,000 or more, depending on the local real-estate market, taxes, and insurance, according to various mortgage calculators.\u00a0<\/p>\n Despite mortgage rates rising, housing demand hasn\u2019t abated, and in effect, housing has become expensive, and for many, unaffordable. Most indicators show that the U.S. housing market is running hot again, as high rates and low inventory create an excess of home-buying demand and a major shortage of supply. <\/p>\n \n \u201c<\/span>\u2018Buying a home when you aren\u2019t ready, or buying too big of a home for what you can afford, can lead to serious financial struggles.\u2019\u201d<\/span>\n <\/p>\n As a result, buyers are having to give up more of their income to achieve their dream of homeownership. At a national level, nearly 41% of a person\u2019s income \u2014 at the median level of $75,000 \u2014 will go towards their home, according to data from the Atlanta Fed. In expensive markets like San Jose and New York City, even though median incomes rise, the typical buyer would spend 70% and 51% of their income on their home respectively, the Atlanta Fed found.<\/p>\n \u201cBuying a home when you aren\u2019t ready, or buying too big of a home for what you can afford, can lead to serious financial struggles, and something that may be hard to come back from,\u201d Michael Cocco, a certified financial planner with Equitable Advisors, told MarketWatch.<\/p>\n Instead of allocating 30% of pre-tax income on housing, Cocco has another rule. \u201cI try to tell clients that if you can keep can keep your mortgage \u2014 and all other debt payments such as car loans, student loans, etc. \u2014 as 33% of your net income after taxes, that will give you a good \u2018margin of safety.\u2019\u201d\u00a0<\/p>\n Kalsman agrees, but said that she usually suggests that a potential buyer keep their total debt payments to less than 36% of their total monthly gross income. <\/p>\n That may be a hard pill to swallow, if one were to include student-loan and car payments \u2014 the typical monthly payment for student-loan debt will be around $210 and $314, and $733 for auto loans, according to Edmunds. The national median mortgage payment in May was about $2,165, according to the Mortgage Bankers Association. <\/p>\n A prospective homebuyer who limited all<\/em> their payments to 33% of their income would need to earn at least $9,600 a month after taxes \u2014 a back-of-the-envelope estimate suggests they would have to make over $150,000 a year.<\/p>\n A silver lining: Homeowners can subtract mortgage interest from their taxable income, which reduces how much taxes they owe. As the Internal Revenue Service explains, for a married couple filing jointly, they can together deduct up to $750,000 on interest in their mortgage.<\/p>\n If a potential buyer is looking to dip into their 401(k) or retirement plan, or considering lowering their retirement contributions in order to pay their mortgage payment, that\u2019s a red flag. \u201cSacrificing your long-term retirement savings to buy a home would not be advisable,\u201d Cocco said.<\/p>\n \u201cI cannot overstate how much of a financial commitment buying a home versus renting is,\u201d he added. Case in point: Your monthly property taxes could be $350 in June 2023, but how much higher will they be in June 2033? <\/p>\n A cautious approach to budgeting is based on the unexpected costs of homeownership, from renovations to maintenance and repairs. Keep in mind that the typical annual cost to maintain a single-family home was $6,409, according to a report from Thumbtack.<\/p>\n Be prepared for a rainy day: a job loss or other unexpected medical expenses that could put your monthly mortgage payments in jeopardy. Kalsman suggests homeowners set up an emergency fund to cover at least 3 to 6 months of expenses.<\/p>\n But Kalsman doesn\u2019t discount the 30% rule entirely. \u201cIt is a good benchmark to help ensure you aren\u2019t over-leveraging yourself,\u201d she said.<\/p>\n<\/p><\/div>\n
\n \u2014 Sara Kalsman, a financial planner at Betterment<\/span>
\n <\/small><\/p><\/div>\n<\/p><\/div>\n
\n RDFN,
\n
\n that salary may not be enough.<\/p>\n
\n \u2014 Michael Cocco, a certified financial planner with Equitable Advisors<\/span>
\n <\/small><\/p><\/div>\n<\/p><\/div>\nA good margin of safety<\/strong><\/h2>\n
Red flags and silver linings<\/h2>\n