Without a shadow of a doubt, the pandemic has upended the way people live. An invisible virus that can kill is like telling everyone there’s a madman with a rifle on the streets. You can’t risk it. With the more aggressive Delta variant giving people a more significant scare recently, nothing is closer to the truth.
True enough, everyone hunkers down at home, keeping their children homeschooled for their safety. Now, all these presents new challenges that did not exist before. For one, when you left the teaching to teachers before, these days, parents have to adjust and contend with their children’s homework.
But such an adjustment is essential not only for families but also for real estate buyers. As the times have changed, purchasing a property presents unique challenges during the pandemic. Therefore, knowing how to make your planned purchase as seamless as possible is key.
The good news is the 30/30/3 rule in buying property should go a long way in helping you. Applying this can help ensure you won’t need to cry in regret regarding your real estate deal. Here’s why.
Rule #1: Limit your monthly mortgage to no more than 30% of your gross income
Let’s face it. Mortgage rates are at an all-time low, thanks to the pandemic. Quite naturally, the demand for real estate properties soar. Yet, that should not automatically mean it’s time you buy a house now.
For one, you should take a more pragmatic approach. Take note that in the 2008 financial crisis, many people overextended themselves. In the process, many Americans paid the price, ending up with neck-level stress of living in a house they can’t afford to pay in the long run.
So the first rule is to observe a cap on your monthly mortgage. It must not be more than 30% of your monthly gross income. You might be tempted not to observe this, given that mortgage rates are taking a dive. You might be tempted to buy a more luxurious home, given the low mortgage rates. But if you want to play it safe, not going beyond 30% should be your golden rule.
Note that the lesser your monthly payment, the more it would be best to observe this rule. Someone doing at least $50,000 a month will still have $30,000 if they spend 40% of their income. But someone who has a $5,000 monthly income will have a much lesser cushion after paying their mortgage.
If you’re unsure if your finances are doing well, consulting estate agents should be wise. The real estate sales professional can help you with their experience in property sales, telling you if you’re in the best position to own a house during these trying times.
Rule #2: Have 30% of the property’s value saved up as cash
Now, here’s another great tip. If you want to smooth things out, you need to save at least 30% of the property’s value saved up in low-risk assets or, better yet, cash. Why? That’s because you will have to pay 20% of the home’s down payment. Certainly, it’s a good number, so you get the lowest mortgage payment possible. As for the remaining 10%, that should be used as a cash buffer ready for whatever the pandemic has in store for you.
It’s a big ask, given that there are home loans that allow you to pay a much lesser down for the property. But remember, there is a financial crisis. When the uncertainty is high, having better financial liquidity is a must.
To get back on the 2008 financial crisis example, know that those homeowners who paid a lot less down got blown out faster. As they didn’t have much to lose, they ended up giving up on the mortgage, and in the long run, the property became but a memory.
Learn to focus, though. If you have your down payment ready, make sure you don’t invest it in short-time fixes such as stocks. As these are risky times, you might throw your money away.
Rule #3: Your targeted home should be no more than thrice your annual income
It sounds like a bitter pill to swallow, right? But this is a good rule to follow if you don’t want to stretch yourself thin too much. Do the math. If your total annual income is $300,000, you can afford a $900,000 property. But if it’s just $100,000, buying that $900,000 property would be a stretch.
With the mortgage rates down, stretching this rule to five times your annual income might still be possible. Beyond that number might ask for trouble.
Always remember, the 30/30/3 rule is not to limit you. It’s there to let you live your life minus the hassle and give you the comfort you and your family need. So consider when you’re eyeing to buy a property.