It’s no secret that home prices have continued to climb across the country. In February, the median existing-home sale price in the U.S. reached $398,400, a 3.8% increase from the year before, according to the National Association of REALTORS. Even with mortgage rates hovering above 6.5%, buyers are still purchasing homes, largely driven by a nationwide shortage in housing inventory. But as prices rise and mortgage rates remain high, it’s more important than ever to make smart, personalized decisions when it comes to home affordability.
One commonly cited rule of thumb is the 30% rule which suggests that you should keep your housing costs at or below 30% of your gross income. While this guideline can be helpful in general, it doesn’t reflect the reality many buyers are facing today. Rising costs, stagnant wages, and the full scope of homeowner expenses make this rule feel increasingly outdated.
Why the 30% Rule Falls ShortThe 30% rule isn’t new. It’s been used for decades as a general benchmark for both renters and buyers. For renters, it means monthly rent should not exceed 30% of gross pay. For homeowners, that 30% cap includes mortgage payments, property taxes, insurance, HOA fees, and any other monthly home-related expenses.
But the math no longer supports the rule at least not for the average American. The Bureau of Labor Statistics reports median weekly earnings of $1,192 for the fourth quarter of 2024. That translates to about $61,984 annually, or approximately $5,165 per month in gross income.
Now consider the reality of today’s market: a 30-year mortgage on a median-priced $398,400 home with a 20% down payment and a 6.67% interest rate results in a monthly principal and interest payment of around $2,050. That alone consumes nearly 40% of the median monthly income and that’s before taxes, insurance, or any additional costs are added in. In other words, many Americans simply can’t afford to keep housing under 30% of their gross income — because the math doesn’t add up.
The Problem with Using Gross Income
Another issue with the 30% rule is that it uses gross income (your pay before taxes and deductions ) which gives a distorted view of what you can actually afford. After taxes, health insurance, retirement contributions, and other automatic deductions, your take-home pay is significantly lower.
Using net income (your actual paycheck) to calculate housing affordability gives a clearer and more practical picture of what your monthly budget can handle. A better rule might be keeping housing expenses under 30% of your net pay, not gross.
A Smarter Way to Budget for Housing
Rather than applying a blanket formula to everyone, it makes more sense to consider your personal circumstances, lifestyle, and financial goals. The 30% rule can still serve as a rough starting point, but it shouldn’t be the final word.
1. Adjust for Lifestyle Costs
People living in urban areas without a car may spend very little on transportation. According to AAA, the average cost of car ownership is over $1,000 per month. If you don’t own a car and rely on public transit or walking, you may be able to justify spending a bit more on housing.
On the other hand, if you’re paying for childcare, your expenses could easily rival a mortgage. Care.com reports the average weekly cost of daycare is $343 for infants and $315 for toddlers. Even one child in full-time care can cost more than $1,200 per month which is more than many mortgage payments. That’s a clear reason to keep your housing costs on the lower end of your budget.
2. Factor in Debt and Savings Goals
High-interest debt is another variable. If you’re carrying significant credit card debt, you’ll want to ensure your budget leaves room for aggressive repayments. Experian reports the average credit card balance in the U.S. reached $6,730 in the third quarter of 2024 and many households carry much more.
Long-term goals should also guide your home budget. Saving for your children’s education or investing in your retirement may require allocating hundreds of dollars monthly to 529 plans or 401(k) contributions. If you spend too much on housing, you may be forced to cut back in these areas, which could hurt you down the road.
3. Stay Flexible and Reevaluate Often
Life circumstances change — and so should your budget. A home you can afford today might become a burden if your household income drops or your family grows. Likewise, a modest mortgage that leaves room in your budget for other goals could be the key to long-term financial stability.
Instead of stretching yourself to the limit with the biggest loan you’re approved for, aim for a monthly housing cost that allows you to build savings, pay down debt, and live comfortably.
The 30% rule was never meant to be a strict law — and in today’s housing market, it’s often unrealistic. A more accurate approach is to budget using your net income and factor in your personal circumstances, lifestyle choices, and long-term goals.
Home prices are high and competition is fierce, but that doesn’t mean you have to sacrifice financial security just to get your foot in the door. By creating a budget that reflects your full financial picture — not just what a lender says you can afford — you’ll be better equipped to find a home that brings peace of mind, not financial stress.