So you want to buy a house? Expect to pay more than 30% of your income.

“The 30% rule, which holds that you should limit the size of your total housing payment — mortgage, taxes and insurance — to 30% of your monthly income, has never been a hard and fast rule,” Sara Kalsman, a financial planner at Betterment, told MarketWatch.

Consider a family earning $100,000 a year, who under the 30% rule, would have less than $2,500 a month to spend on housing after taxes. With the median home price in June at $426,056, according to real-estate brokerage Redfin
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that salary may not be enough.

Redfin estimates that a 30-year mortgage at a rate of above 7% may require a monthly payment of nearly $3,000 or more, depending on the local real-estate market, taxes, and insurance, according to various mortgage calculators. 

Despite mortgage rates rising, housing demand hasn’t abated, and in effect, housing has become expensive, and for many, unaffordable. Most indicators show that the U.S. housing market is running hot again, as high rates and low inventory create an excess of home-buying demand and a major shortage of supply.

As a result, buyers are having to give up more of their income to achieve their dream of homeownership. At a national level, nearly 41% of a person’s income — at the median level of $75,000 — will go towards their home, according to data from the Atlanta Fed. In expensive markets like San Jose and New York City, even though median incomes rise, the typical buyer would spend 70% and 51% of their income on their home respectively, the Atlanta Fed found.

“Buying a home when you aren’t ready, or buying too big of a home for what you can afford, can lead to serious financial struggles, and something that may be hard to come back from,” Michael Cocco, a certified financial planner with Equitable Advisors, told MarketWatch.

A good margin of safety

Instead of allocating 30% of pre-tax income on housing, Cocco has another rule. “I try to tell clients that if you can keep can keep your mortgage — and all other debt payments such as car loans, student loans, etc. — as 33% of your net income after taxes, that will give you a good ‘margin of safety.’” 

Kalsman agrees, but said that she usually suggests that a potential buyer keep their total debt payments to less than 36% of their total monthly gross income.

That may be a hard pill to swallow, if one were to include student-loan and car payments — the typical monthly payment for student-loan debt will be around $210 and $314, and $733 for auto loans, according to Edmunds. The national median mortgage payment in May was about $2,165, according to the Mortgage Bankers Association.

A prospective homebuyer who limited all their payments to 33% of their income would need to earn at least $9,600 a month after taxes — a back-of-the-envelope estimate suggests they would have to make over $150,000 a year.

Red flags and silver linings

A silver lining: Homeowners can subtract mortgage interest from their taxable income, which reduces how much taxes they owe. As the Internal Revenue Service explains, for a married couple filing jointly, they can together deduct up to $750,000 on interest in their mortgage.

If a potential buyer is looking to dip into their 401(k) or retirement plan, or considering lowering their retirement contributions in order to pay their mortgage payment, that’s a red flag. “Sacrificing your long-term retirement savings to buy a home would not be advisable,” Cocco said.

“I cannot overstate how much of a financial commitment buying a home versus renting is,” he added. Case in point: Your monthly property taxes could be $350 in June 2023, but how much higher will they be in June 2033?

A cautious approach to budgeting is based on the unexpected costs of homeownership, from renovations to maintenance and repairs. Keep in mind that the typical annual cost to maintain a single-family home was $6,409, according to a report from Thumbtack.

Be prepared for a rainy day: a job loss or other unexpected medical expenses that could put your monthly mortgage payments in jeopardy. Kalsman suggests homeowners set up an emergency fund to cover at least 3 to 6 months of expenses.

But Kalsman doesn’t discount the 30% rule entirely. “It is a good benchmark to help ensure you aren’t over-leveraging yourself,” she said.