I received this question via email, regarding the “30% rule” when making your mortgage or rent payment:
I know that you’re supposed to stay around 30% of your income for housing costs per month. Is that 30% of net or gross, and is that only for the housing, or do they recommend staying under 30% for housing and all utilities?
This is an interesting question without a straightforward answer. “They” say many things, but from what I can tell from talking with some other financial types and consulting my common sense, the basic rule is 30% of your pre-tax (or gross) earnings, and that doesn’t include utitilies.
That said, here is what I, personally, think:
Try to keep your housing payment to 28% of your net monthly income.
Many mortgage lenders, if you want the best mortgage interest rate, have what is known as the 28/36 qualifying ratio. This means that your mortgage payment should only be 28% of your monthly income and no more than 36% of your monthly income should go to total debt (mortgage + other obligations). I suspect that this is even more common in the current economic climate.
I think that you would be wise to keep your housing payment — mortgage or rent — to 28% of your net income, rather than relying on your pre-tax income. (Our mortgage payment is 25% of our net income.) It might get you qualified, but you want to be able to afford the home without being “house poor” . I would even go so far as to include PMI and property taxes in the category of “mortgage payment”. We’ve done this, and our total housing expenses (including utilities and maintenance) is less than 30% of our monthly income.
What do you think is a reasonable percentage of your monthly income to make for housing?
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