HOMEBUYING: Why is the number “3” so important?
- Noir Holdings, LLC
- Jul 7
- 3 min read
Homebuyers today are bombarded with many “rules” and “guidelines” to follow in order to be able to afford a home in today’s real estate market.
Many of these rules are rooted in common sense and are important.
As a homebuyer today, one of the rules you may have heard over and over is the 3-3-3 rule. Let’s look at this rule more closely.
The 3-3-3 rule
The 3-3-3 rule refers to three big elements buyers should pay attention to when it comes to purchasing a home: income related to home price, down payment amount, and monthly budget. Let's review these three elements.
INCOME X 3 = HOME PRICE MAXIMUM The first 3 is related to the general rule that your home’s price should not exceed your yearly income times three. So if your combined household income is $175,000, your home’s purchase price should not exceed $525,000.
This is a nice, easy way to calculate things, but there are so many variables that also need to be taken into account such as your debts, savings, investments, and more. Your lender does a much deeper analysis of a home’s affordability than this “3” rule, but if you want to limit the amount of house debt you take on, following this rule can be helpful.
HOME PRICE X .03 = DOWN PAYMENT A 3% down payment is often the minimum amount you’ll need to qualify for a loan program today. On that $525,000 home, it would require $15,750 as a down payment which is a much more manageable amount than $105,000 which is a 20% down payment.
PITI = 30% The next 3 is actually a third. The rule says that your PITI (mortgage principal, mortgage interest, property taxes, and homeowners insurance) payment should not equal more than 30% of your gross household income. So for that $175,000 household income, your PITI should not exceed $52,500 per year, or $4,375 monthly.
Other “3” guidelines
3 MONTHS OF EMERGENCY FUNDS Some financial experts recommend that you should have three months of funds saved up for an emergency. So, if your monthly expenses for housing, utilities, food, car payments, etc. are $6,000 per month, you should have saved $18,000 ($6,000 x 3) in an easily accessible account to be available for emergency.
3 MONTHS OF MORTGAGE PAYMENTS Other financial guidelines recommend having a fund dedicated to stashing away three months of just mortgage costs to have as an emergency cushion. If your mortgage payment is $3,000, you would save $9,000 ($3,000 x 3) in this account.
3 HOMES / 3 VISITS / 3 NEIGHBORHOODS Real estate experts, helping buyers make the best choice for their next home, suggest touring at least three homes in three different neighborhoods to be able to better evaluate the homes under consideration. Finally, visiting that chosen home three times – for example, on the weekend, in the evening, during rush hour – can shed light on whether to make an offer on the home. Keep in mind that adhering to this process can be difficult, especially in a competitive real estate market.
Your financial situation
Of course, every homebuyer’s financial situation is unique. After reviewing your own calculations and examining your budget, you need to consider your comfort level with your proposed mortgage payment and home-related expenses. It is a good idea to consult your mortgage lender, financial advisor, and tax professional to understand the complete impact of your home purchase on your finances.
And, ensure you have undertaken mortgage preapproval to learn how big of a mortgage your lender will approve you for and what home price range you should be focusing on.
Looking to buy a home?
Check out Noir Holdings’ updated homes available in established neighborhoods in suburban Chicago: www.noirholdingsllc.com Buy direct from Noir Holdings and save!
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