How Much of My Income Should I Budget for My Rent or Mortgage?
Whether you’re renting or buying a home, you need to be careful with your monthly budget. Budgeting is one of the best ways to manage your finances, and that means keeping track of your monthly income and expenses.
One of the biggest questions when it comes to budgeting is how much to spend on housing. A lot of people are asking themselves, “How much of my income should I budget for my rent or mortgage?” If you’re asking this question, you’ve come to the right place. As the costs of rent and mortgages go up across the country, it’s time to answer this question once and for all.
The 30% Rule
If you’ve tried to rent an apartment recently, you might have come across the 30% rule. This rule states that your rent can’t exceed more than 30% of your monthly income. Using this rule, you’d need an income of over $3,333 a month to afford a monthly rent of $1,000.
Where does this rule come from? It’s actually been around since the 1980s. In 1981, the U.S. government agreed that spending over 30% of your income on housing makes you “cost burdened.” Those who spend over 50% of their income on rent are considered to be “severely cost burdened.”
This doesn’t just apply to rent. The same 30% rule applies to mortgages as well, and this monthly payment will be taken into account when you apply for a mortgage. However, as you might realize, the world isn’t so cut and dry. There might be instances where you can’t afford your housing payment to be 30%, and there are also situations where you might be able to pay more.
When Can You Pay Over 30%?
According to some money experts, there are instances when you can afford to pay more than 30% of their income on rent or a mortgage payment. It all comes down to what you owe. If you have no debt, you can pay as much as 41% of your income on housing.
The opposite is also true. If you’re currently struggling with debt or recovering your credit score, you might not be in a position to afford to pay 30% of your monthly income on housing.
Another popular guideline for paying housing costs is known as the 28/26 rule. In this rule, you should spend no more than 28% of your gross monthly income on housing costs and no more than 36% of your income on total debt. Ultimately, everyone’s financial situation is different, and there’s no single answer for how much you should pay on your rent or your mortgage every month.
How to Determine How Much You Can Pay on Housing
Since everyone’s situation is different, let’s talk about how to decide just how much you can afford to pay. Follow these steps to create your own housing budget.
- Check for rules. First, if you’re applying for a rental home or a mortgage, check for any rules about just how much you need to afford. This should guide your process. Many landlords and mortgage companies uphold the 30% rule.
- Calculate your income. Next, determine just how much money you bring in each month. If you’re married or living with someone, calculate their income as well.
- Subtract monthly expenses. Subtract all of your monthly expenses outside of your housing. Include things like insurance, food, transportation, etc.
- Subtract debt payments. Subtract any debt payments like credit card payments, student loans, and so on.
- What’s left? Now, you’re left with any remaining funds that you have after all other expenses have been calculated. How much of this remaining income can you afford to part with each month?
There are always ways to make housing costs more affordable. You could find a roommate, rent a room, or downsize. Finding a home or rental you can afford is a major step to finding financial freedom.
Are you wondering how much you should budget for your rent or mortgage? If so, you’re not alone. It’s not always clear just how much you need to save for your housing payment each month.
Hopefully, this guide will help narrow your search when looking for a rental or mortgage. Now you know just how much you can afford to stay on top of your financial goals.