The 3-30-10 Rule For Home Buying

Kritchanut / Getty Images

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

When it comes to buying a house, budgeting wisely is crucial to ensure financial stability and avoid being overburdened by mortgage payments. One helpful guideline in this process is the 3-30-10 rule, a simple yet effective framework for determining how much house you can afford.

Keep reading to learn how it works.

Introduction to the 3-30-10 Rule

The 3-30-10 rule offers a straightforward strategy for budgeting for a home purchase, with three main elements:

• Housing costs: Your home’s price should not exceed three times your annual income. This keeps housing costs within a reasonable proportion of your earnings, reducing the risk of financial strain.
• Down payment: Aim to make a down payment of at least 20% of the home’s purchase price. A higher down payment can reduce your mortgage amount, lower monthly payments and possibly eliminate the need for private mortgage insurance. You should also have at least 10% of the home’s value saved up in an emergency fund.
• Mortgage payments: Your monthly mortgage payment should not be more than 10% of your gross monthly income. This percentage includes principal, interest, taxes and insurance. Staying within this limit ensures that you have enough income left for other expenses and savings.

Breaking Down the 3-30-10 Rule

The 3-30-10 rule can help aspiring homeowners buy properties that they can afford. Some people buy more than they can afford and end up underwater on their mortgage payments. Here’s a deeper analysis of the rule:

The ‘3’ — Home Price Limit

The rule of three in home buying suggests that you shouldn’t purchase a house that costs more than three times your annual household income.

For instance, if your household income is $120,000, you should aim for houses with a list price not exceeding $360,000.

This rule helps in keeping your mortgage payments manageable in relation to your income, ensuring that your home purchase is a financially sustainable decision.

It’s difficult to achieve this part of the rule today. The home price to median household income ratio is more than 7.0 in the United States. However, the ‘3’ part of the rule can inspire people to trim unnecessary expenses and look for housing in more affordable areas. While housing has been steadily increasing in the United States, it’s more affordable if you ignore the east and west coasts.

The ’30’ — Saving Before Purchasing

This rule also stipulates that you save 30% of the home’s value before purchasing it. Homeowners who follow the rule will make a 20% down payment and have 10% in an emergency fund. Keeping cash in an emergency fund gives you more flexibility with making mortgage payments even if you lose your job or your business goes through a slower season than expected.

For instance, if you are looking to buy a $500,000 house, it is a good idea to save $150,000. The buyer can make a $100,000 down payment and put $50,000 into a high-yield savings account. This approach results in more financial security while helping you avoid private mortgage insurance.

The ’10’ — Monthly Mortgage Payment

The final piece of the puzzle is to keep monthly mortgage payments below 10% of your gross monthly income. For instance, a homeowner with an $8,000 monthly income should not spend more than $800/mo on mortgage payments.

Again, this rule isn’t easy to follow, but it can serve as a good goal. Furthermore, being tight on how much of your gross income goes toward mortgage payments can help you pursue more manageable houses. Having a lower percentage of your monthly gross income go toward the mortgage makes it easier to invest in assets and fortify your finances.

Advantages of Following the 3-30-10 Rule

The 3-30-10 rule offers a structured approach to home buying that aligns with sound financial planning. It ensures that your home purchase decision is made with a comprehensive view of your overall financial health. Here’s how it can positively impact your budgeting process:

• Financial stability: Monthly mortgage payments will feel more manageable and you won’t have to worry about private mortgage insurance. Having a financial buffer can also minimize the risk of falling behind on mortgage payments and entering foreclosure.
• Ability to handle unexpected expenses: Many homeowners make themselves vulnerable by putting too much of their monthly income into mortgage payments. Only putting 10% of your paycheck into mortgage payments makes it easier to stockpile cash and save for a rainy day.
• Increased savings and investment opportunities: Buying assets like stocks is an important part of building wealth. By purchasing a reasonably-priced house, you can make those types of investments more often.

Challenges in High-Cost Living Areas

While it’s feasible to uphold this rule in low-cost areas, it’s much harder to keep up with all three checkpoints in expensive areas.

Homeowners may have to make larger down payments to ensure that only 10% of their gross income goes toward monthly mortgage payments.

One workaround is to limit your monthly mortgage payment to 30% of your gross monthly income. Some people who advocate for the 3-30-10 rule reverse mortgage payments and down payments in the equation. While no more than 30% of your income goes to the mortgage, this adjusted rule also lets you get away with a 10% down payment.

If you have a mortgage payment that is more than 10% of your gross monthly income, you should look for higher-paying jobs or pick up a side hustle. Making an additional mortgage payment each month can also help you get out of debt sooner and make 10% more feasible in the future. Moving to a more affordable location or buying a smaller house may be requirements for some people who want to carry out the 3-30-10 rule as it is intended.

Practical Steps to Implement the 3-30-10 Rule

If you can buy a house that’s less than three times your income while putting 20% down and ensuring mortgage payments are less than 10% of your gross monthly income, you will be in a good position. Even if you don’t achieve these exact figures, pursuing this goal can make your biggest expense more reasonable.

These are some of the practical steps you can take to turn this rule into your reality:

• Assessing your financial situation: Reviewing your net worth, assets, income, expenses and opportunities can help you gauge the viability of the 3-30-10 rule.
• Setting realistic home-buying goals: This rule isn’t applicable for everyone. However, it can inspire you to look for a more reasonable home instead of buying far more than you can afford.
• Creating a savings plan: You will need a lot of money to make a 20% down payment and still have 10% left over. A good savings plan can help you reach key milestones sooner.
• Calculating affordable mortgage payments: Advocates of the 3-30-10 rule can divide their gross income by 10 to determine an affordable mortgage payment. However, people who prefer enough flexibility to put 30% of their gross monthly paycheck toward the mortgage can make higher monthly payments.

Final Take to Go

The 3-30-10 rule is a simple yet effective guideline to help you stay financially secure when buying a home. By ensuring your down payment is at least 3%, keeping your monthly mortgage payment within 30% of your income, and maintaining at least 10% of your home’s value in savings, you can set yourself up for long-term financial stability.

Before making a purchase, take the time to evaluate your budget, compare loan options, and consider your future financial goals.

Ready to start your home-buying journey? Review your finances and explore mortgage options to find the best fit for your needs.

Information is accurate as of March 20, 2025.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

Share This Article: