How Much of Your Income Should Go Toward Housing

How Much of Your Income Should Go Toward Housing?

If you’re ready to start house-hunting – or if you’re just looking to build a better budget – you need to know how much of your income should go toward housing.

Finances can be complex.

Luckily, when it comes to housing, you can get started with two easy rules of thumb.

The first is the thirty percent rule.

It says you should spend no more than thirty percent of your gross monthly income on housing expenses –

so you have enough money left over for other important expenses like food, transportation, and healthcare.

Your gross monthly income is your total income before taxes or other deductions.

Now let’s look at housing expenses.

If you’re a renter, that includes your rent plus any utility costs that you cover, like heat, water, and electricity.

If you’re a homeowner, your housing expenses include your mortgage principal and interest, property taxes, homeowners insurance, any homeowners association fees, and your utilities.

Let’s look at a couple of quick examples.

This is Randy. He’s a renter. His gross monthly income is four thousand dollars. According to the thirty percent rule, he can spend twelve hundred dollars on housing. His rent is one thousand dollars a month, and his utility bills average two hundred dollars a month. As you can see, Randy’s housing costs are thirty percent, so his budget is in good shape.

This is Hannah. She’s a homeowner. Her gross monthly income is six thousand dollars. She spends eighteen hundred dollars on housing. Her principal and interest are twelve hundred dollars. Taxes are two hundred forty dollars a month, insurance is one hundred twenty dollars, and utilities total two hundred forty. According to the thirty percent rule, Hannah’s total housing expenses are affordable, too.

When it comes to buying a new home and qualifying for a mortgage, there’s another rule of thumb you’ll need to know.

This one’s known as the twenty-eight thirty-six rule.

To qualify for a mortgage, lenders prefer that you spend no more than twenty-eight percent of your gross monthly income on your mortgage principal and interest, property taxes, homeowners insurance, and any homeowners association fees. You don’t need to include utilities this time.

They also prefer that you spend no more than thirty-six percent on total debt – and that includes your mortgage principal and interest, property taxes, homeowners insurance, and any homeowners association fees, plus car loans, student loans, credit card debt, and anything else you owe.

Remember – when it comes to your budget and goals, there’s no one-size-fits-all strategy.

The thirty percent rule and the twenty-eight thirty-six rule are general guides – but they can help you start to budget smart and explore your options.

And when you’re ready for the next big step – a trusted financial partner can provide personalized service and answer all your questions.

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