Buying a property, whether it’s a house or condo, should always be within your budget. This means before settling down and signing the contract, you should first determine if the home you’re buying would be within your means. There are a couple of suggested financial rules that, if followed, allows you to be financially healthy while investing in your future home.
If you want to buy a home designed that closely following Khmer architecture in Cambodia or even condominium units, make sure to keep reading below to make a smart financial move.
Financial rules to consider
To be financially-savvy, make sure to consider one or more financial rules listed below:
1. 28% Rule
The 28% rule indicates that your payment for mortgage and other housing costs shouldn’t exceed this percentage in your gross income. If costs exceed 28%, then it will be difficult to pay your monthly housing.
2. 28%/36% Rule
Considering that the 28% rule helps determine the maximum expense on housing, then the 36% rule allows you to manage the amount of debt you have while remaining financially stable. In this rule, buying a home plus your debt shouldn’t exceed 36% of your income.
This means, after you subtract 28%, you have to ensure that car payments, credit cards and more shouldn’t be higher than the remaining 8%. If it’s higher, you might find it difficult making ends meet.
3. 32% Rule
The 32% rule is a combination of other rules wherein all expenses for the month, whether it’s for housing, debt, or even food, shouldn’t exceed this percentage against your monthly income. This will help minimize financial risk and ensure you can still invest and spend money on things that matter to you.
4. 40% Rule
The 40% rule follows the same idea as the rest that your total debt shouldn’t exceed 40% of the income that you’re earning monthly. If it does, then most likely is that you wouldn’t be approved for home loans since this is what lenders often thoroughly consider in an application.
5. 2.5X Rule
The 2.5X rule is straightforward since you only have to multiply your yearly income to this number. This will determine what properties are within your budget. For example, you’re earning $25,000 per month so your annual income is $300,000. If you multiply that to 2.5, then you can afford properties up to $750,000.
6. 3X Rule
You need to use the 3X rule if you’re paying 20% for any kind of debt. For example, you make $10,000 monthly and rakes $120,000 yearly. However, you pay around $2,000 for credit cards, loans, and more monthly, then you have to multiply your annual income to three. This will help determine financial stability for you.
7. 4X Rule
On the other hand, if you do not spend equal to or more than 20% of your monthly salary to pay for debt, then you can use the 4X rule. Just multiply your yearly salary to four and get properties that cost higher but potentially have better location or more.
8. 5X Rule
Meanwhile if you don’t have debt, then you can widen your net for properties to buy by multiplying your annual income to five. However, keep in mind that even if you get approved for a more costly home, you still have to find a property that won’t eat a lot of your income just for the mortgage alone.