Buying A House Using The 3-3-3 Rule

These days, buying a house seems to be out of reach for a lot of people. High interest rates, sellers who overprice their homes, and confusing loan options can make the situation feel hopeless. Several guidelines exist to simplify the process, like the 3-3-3 rule for buying a house.

The core concept of the 3-3-3 rule when you buy a house is to look for a home with a purchase price no more than three times your annual income. Next, put down at least three percent, and finally, make sure your monthly housing costs don’t go over 30% of your gross monthly income.

This rule offers some good parameters to get homebuyers on the right track. However, as with any rule, there are nuances for individual buyers. Also, some think these guidelines set buyers up for financial strain.

Breaking Down The 3-3-3 Rule For Buying A House

Purchasing a home is a huge milestone, so it makes sense that people want to do it right. Finding helpful tips and guidance on how much home you can afford is a logical first step. Of course, running your specific numbers and making sure everything fits into place is critical. However, you need to start somewhere, and many homebuyers use the 3-3-3 rule as a jumping-off point. Overall, it focuses on three main points, each with nuances worth considering before you commit to it fully.

1. The Purchase Price Shouldn’t Be More Than Three Times Your Income

The first phase of the 3-3-3 rule is about the house price. It’s definitely a good, quick benchmark to make sure you’re not looking for something way beyond your means. It cautions homebuyers to look at houses that are no more than three times their annual income. If you make $100,000 a year, you should stick with homes that are $300,000 or less.

According to recent Federal Reserve Economic Data (FRED), the median household income in the US as of 2024 is $83,730. Based on this amount, a maximum purchase price would be $251,190. In 2026, FRED places the median home price in the US at $410,700, so you can already see why many buyers are finding the process challenging.

This is where those nuances come into play. Imagine you earn $80,000 a year, making your max purchase price $240,000. However, you plan to put 20% down on a home. You find a house for $300,000, and after 20% down, you only finance $240,000. In this example, you’re still within three times your income. Technically.

2. Put Down At Least 3 Percent

The second step is to have at least a three percent down payment. This is far lower than the standard 20% recommended by financial experts. However, waiting until you have 20% can make you feel as if buying a home is light years away. Twenty percent of something that costs $300,000 is quite a chunk of change that can be challenging for many buyers to save. Three percent sounds much more doable, but there are a few things to consider.

The 3% Down Payment Pitfall. If you only plan to put three percent down on a home, you have extra rules and regulations to follow. Depending on your situation, you may need to meet certain requirements, like being a first-time buyer, having a 620 credit score, or even completing a homeownership education course. These are all things you would need to discuss in detail with your lender. Regardless, if you put down less than 20%, you need to pay private mortgage insurance (PMI), which means your monthly costs will be higher.

Putting only three percent down on a home puts you in a shaky equity position. If home prices drop within the first few years, you could already be underwater. Also, with such a small down payment, you’ll end up with higher interest rates and paying more interest over the life of the loan.

3. Housing Costs Should Be 30% Or Less Of Your Gross Income

The final part of the 3-3-3 rule for buying a home is to keep housing costs equal to or less than 30% of your gross income. So, if your gross income is $7,000 a month, you should pay no more than $2,100 on housing, costs which include more than just your mortgage. They include property taxes, homeowners’ insurance, and any other required insurance costs. Some experts even include core utilities in this number.

If your mortgage is $1,800, then you would need insurance, property taxes, and utilities to be $300 or less if you make $7,000. This likely already seems a bit tight, but here’s something else to think about—the potential issue with this rule. Taking a percentage of your gross income to determine your housing costs is risky. This rule doesn’t know your unique situation, which is why it should only be a quick benchmark.

Here's an example: you earn $7,000 a month gross; however, you put 5% into your 401 (k), and your company deducts $400 for health insurance. Now your paycheck is $6,250, but don’t forget taxes. After taxes, your net pay, or what you bring home, is $5,050. If you were to follow the 30% of your gross income rule, that would mean your housing costs are $2100, leaving you with $2,950 for everything else. In this example, you’re putting almost 50% of your available income to housing. You still have food to buy, internet, cell phone, car insurance, gas, maybe childcare, clothing. And you haven’t even started figuring in savings, investing, or giving.

Should You Do 25% Of Take-Home Pay Instead?

Several financial experts recommend a more conservative goal of 25% of your take-home pay going to housing costs. But when you consider this number, finding a home in today’s market can feel even more like a fairy tale. In the above example, this would mean you’d have $1,262.50 for housing costs. In many cities, you can’t even find places to rent for this price. Of course, on the flip side, in some markets this would be doable. So ultimately, you have to think about what works best for you in your current season of life.

The 3-3-3 Rule Leaves Out A Few Things

In addition to purchase price, down payment, and basic housing costs, you also need to think about upkeep. Maintenance is a big expense, and this doesn’t even figure in emergency issues, like a leaky roof or busted water heater. Every home requires basic upkeep, like HVAC service, cleaning filters, cutting the grass, pest control, and even changing batteries in the smoke alarms. These costs don’t necessarily always coincide with the purchase price of a home, but with its size.

A good rule of thumb is to budget 1% to 4% of a home’s value on maintenance, but you also have to consider how big or small your home is. If you spend $500,000 on a home in Iowa that’s 3,000 square feet, it’s going to cost more to maintain than an 800-square-foot home in Los Angeles for the same price. Again, the rule also doesn’t consider individual situations, like how much personal debt you have, financial goals, or lifestyle preferences. No matter what rule you decide to follow to determine your rough budget for home buying, you need to always look at your specific numbers.

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• Hidden Costs You Need To Know When Buying A Home
• Red Flags To Look For When Buying A Home