How Much Money Should You Be Paying For Housing Based On Your Income?
Are you planning to make a move soon? One of the factors to consider before you choose where to live is how much to spend on housing. You don't want to overspend on your housing costs, making it harder to maintain your home, save for a rainy day, or achieve other financial goals you have.
Lenders use your total housing costs to determine how much they will lend to you in a home loan. According to Investopedia, your total costs typically include your utilities, mortgage payment, insurance premiums, and things like taxes and other bills related to living in your home. In short, it's the total amount of money you will spend each month to keep that roof over your head. The tricky question is knowing what's affordable to you — you may think you know how much you can comfortably spend each month on a loan payment, but your lender may think otherwise.
What your lender expects
Many lenders focus on the rule that says that no more than 30% of your total income should go towards your housing costs. This is a long-standing rule that applies to your before tax and deduction income, according to CNBC. That means that you should have 70% of your income going towards everything else (like food and fun). The belief is that most people can put 30% of their income into housing and still have enough money to meet their other financial obligations.
Not all lenders follow this goal — many focus on your debt-to-income ratio, which is the ratio of how much debt you have compared to how much income you have each month. Lenders set the ratio they are willing to accept for borrowers. Most often, having a figure that's under 36% is good. No more than 28% of that should go towards debt servicing, which covers the cost of your mortgage payment, states Investopedia.
Set what you can afford
Before you make a decision on how much money you could spend on a mortgage loan, do your homework — create a budget that reflects your goals of home buying. In short, you may not want to have a big monthly mortgage payment if it squeezes other investments you are making.
Freddie Mac offers a bit of different advice when it comes to how much of a home you could purchase, recommending multiplying your current annual gross income by 2.5. That's the amount of money you earn prior to taxes. Aim to buy a home around that price range to keep it affordable to you overall. Once you get into a new home, you don't want your mortgage payment to be so high that you can't afford to make it. By keeping your housing costs lower, with a more affordable home, you could have more financial freedom in the future.