What Is the 3-3-3 Rule in Real Estate? A Guide to Homebuying

 

The rule is simple; its aim is to help buyers protect their hard earned money before making any decision pertaining to buying a house or property. This is not something set in stone but a simple suggestion of Aaron Jones, a licensed real estate advisor hailing from Okoboji, Iowa. Setting aside a financial margin, such as several months of mortgage will mitigate uncertainties related to anything financial should there be drastic changes in your income or emergencies. Multiple property evaluations will also prevent you from making rushed decisions that you might regret later on.

First 3: Have Three Months of Emergency Savings Before Buying a Home

Many buyers, especially first-time home buyers, make the mistake of just saving for the down payment and closing costs. Although there is nothing wrong with doing just that, it is just that when it comes to the 3-3-3 rule, it completely ignores the financial cushion that it advocates. 

Imagine if at first, everything goes right, and after a few months, you are hit with an emergency, or worse, you lose your job. Your major milestone, which was buying your dream home, now becomes your biggest financial hurdle. You won’t just be losing your home, but you also lose all the years you spent saving to acquire one. But applying the 3-3-3 rule will prevent this, as you will have months of time to figure things out.

What Counts as an Emergency Fund?

An emergency fund is money set aside specifically for unexpected situations that could affect your financial stability. This money should be easy to access and kept separate from funds intended for your down payment, moving expenses, or other planned costs.

Examples of emergencies may include:

• Unexpected medical bills
• Job loss or reduced income
• Major car repairs
• Emergency home repairs
• Temporary family emergencies

How to Calculate Three Months of Living Expenses

To determine how much emergency savings you should have, start by calculating your essential monthly expenses. Focus on the costs you would still need to pay if your income suddenly stopped.

These expenses may include:

• Mortgage or rent payments
• Utilities
• Groceries
• Insurance premiums
• Transportation costs
• Minimum debt payments
• Childcare expenses

Upon identifying the various costs for monthly expenses for essentials, get the total of the amount and then multiply it by three. For example, if the total for monthly expenses is $4,000, then the amount you need for the 3-3-3 rule would be $12,000.

You can have more than 3 months' worth of emergency savings depending on how it fits your circumstances. If you fear that something big might happen in the near future then it would be best to save more. These situations are the reasons you might need to dip into your savings. You might wonder how emergency funds turned into living expenses, but the idea is to determine how much you need or the cost of keeping your regular life running while you try to get back on your feet for a few months.

Second 3: Save Three Months of Mortgage Payments

The second part of the 3-3-3 rule encourages buyers to save an amount equal to three months of mortgage payments before purchasing a home. While this may sound similar to having an emergency fund, the two serve different purposes. An emergency fund is meant to cover your overall living expenses during a financial hardship, while a mortgage cushion is specifically intended to help you keep up with your housing payments if unexpected challenges arise.

Having this extra reserve can make the transition into homeownership less stressful and provide additional financial security during the first few years of owning a home.

What This Part of the Rule Means

The purpose is simple: if you experience a temporary financial setback after buying the home, you'll have funds available to help keep your mortgage current while you work through the situation.

Why a Mortgage Cushion Matters

Because once again, most buyers think that the expenses end once the sale is complete, but in fact, they do not. Realistically, people would normally encounter having to purchase furniture, maintenance issues, appliances, and other costs that may come later that weren't part of your original budget.

So instead of worrying about the uncertainties that might follow, having 3 months' worth of mortgage reserve will help reduce stress in making your next payment. This will also prevent you from making additional loans, whether from friends, credit cards, or bank loans with high interest that are surely going to make your life even harder.

Expenses Included in Your Monthly Mortgage Payment

Common expenses may include:

• Principal, which reduces the amount you owe on the loan
• Interest charged by the lender
• Property taxes
• Homeowners insurance
• Mortgage insurance, if required
• Homeowners association (HOA) fees in some communities

 

Third 3: View Three Similar Properties Before You Buy

The final part of the 3-3-3 rule is not about saving money anymore, finally! This part is all about making sure you are getting the best value for your money. This rule encourages you to look at at least 3 properties with similar features, size, and location before deciding on a home. In this way, you are helping yourself make a more informed decision.

This rule allows you to better understand local market conditions, compare features, and identify potential pros and cons, and you can start this with only using your phone and looking at listings. If you wish to have a private viewing, you can also do so.

Why Looking at Only One Home Can Be Risky

Making a sound decision will not be possible without comparing properties. You wouldn’t know if the house you are interested in is priced right or fairly or even whether it fits your needs.

To make an informed decision when it comes to buying a home, these questions must be answered first before making the next move:

• Is this home priced competitively?
• Are similar homes offering more features?
• Is the location as desirable as other nearby neighborhoods?
• Are there better options within the same budget?

What to Compare When Viewing Similar Properties

Not every home will be identical, but comparing properties with similar characteristics can provide valuable insights.

Consider comparing factors such as:

• Square footage
• Number of bedrooms and bathrooms
• Lot size
• Property condition
• Neighborhood amenities
• School districts
• Commute times
• Recent upgrades or renovations
• Asking price

This part may require you to do more on your part, but hiring a good real estate agent can do rule number 3 for you while you do other important things. You can even have realtors do everything while you are in another state.

 

 

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