The market is hot and its tempting for buyers to overextend. So I want to offer you risk-averse buyers a 3 home-buying rules called 30/30/5 so you can get into the market and you can survive any financial downturn. Ready to buy responsibly?

Way too many homebuyers overextended themselves with the help of overly easy credit guidelines during the financial crisis of 2008 and so we resulted in a slew of foreclosures. Things are different now, for example lenders are much tighter on their guidelines, they require evidence of income rather than stated and they require a larger down payment. However ultimately buyers are responsible for their purchase.

Home Buying Rule #1

Try to Spend no more than 30% of your gross household income on a monthly mortgage payment. For example spending 30% of your monthly $20,000 gross income is $6000 for mortgage and leaves you with $14,000 cushion to take care of your basic needs and save. If you were to up that to 40% your mortgage would be $8,000 with $12,000 remaining for basic needs. Imagine if you have a household with much less income, your cushion would be very small. Remember, You must be able to take care of your basic needs with the remaining money.

Home Buying Rule #2

Have at least 30% of the home value saved up in cash or some kind of semi-liquid assets like stocks. The reason for this is you should have 20% for the down payment to avoid PMI insurance and get the lowest mortgage rate. Then you need up to 2% for closing costs and the rest is just a healthy cash buffer just in case of a rainy day. Now when interest rates are so low Im not saying you have to put a 20% down payment when you can put 10% but you need to have that money readily available because the homeowners that got into trouble the quickest during the previous recession had minimal down payment with no savings.

Home Buying Rule #3

Limit the value of your target home to no more than 5 times your annual household gross income. This is a quick way for homebuyers to understand their risk averse price range. For example if you’re gross household income is $200,000 you can comfortably buy a million dollar home. If you’re annual gross household income is $500,000 you can comfortably buy $2,500,000 million dollar home.

Even if you follow just one part of the rule, you will be able to enjoy your property more because you will be less stressed about your finances. But ideally, of course, follow 2 or more parts! And if you want to violate the rule, then at least consider doing any of the following:

Rent out a portion of your house,

Try to get a raise or job promotion,  

Create a business on the side to have a way to legitimately deduct a home office and other expenses

Build new passive income streams

Be really nice to your parents and rich relatives

Just kidding on that last one.

If you need a Real Estate agent, I’d be more than willing to help you. If you are looking at the option of buying a home or selling a home in the San Francisco or the Peninsula in the near future please reach out to us.