Advice
How much of your income you should spend on housing?
29/11/2018 10:21 | Source: CNBC
For many people, the biggest monthly expense may be for housing. It may eat up a good chunk, or even the majority, of your paycheck. But how much of your income should be going towards your home?

Money expert David Bach offers a slightly different rule of thumb, which he outlines in his book, "The Automatic Millionaire": "According to the Federal Housing Association, a good rule of thumb is that most people can afford to spend 29 percent of their gross income on housing expenses - as much as 41 percent if they have no debt."

These numbers can be applied to rent, Bach notes. So if you earn $70,000 a year, you should be able to spend at least $1,692 a month - and up to $2,391 a month - in the form of either rent or mortgage payments.

How much of your income you should spend on housing?

As a general rule, you want to spend no more than 30 percent of your monthly gross income on housing. If you're a renter, that 30 percent includes utilities, and if you're an owner, it includes other home-ownership costs like mortgage interest, property taxes and maintenance.

Why 30 percent? It's a standard that the government has been using since 1981: Those who spend more than 30 percent of their income on housing have historically been said to be "cost burdened." Those who spend 50 percent or more are considered "severely cost burdened."

Another popular guideline people follow is the "28/36 rule," which says that you should spend no more than 28 percent of your gross monthly income on housing costs and no more than 36 percent on total debt, including housing and other debt like student loans or car loans. Mortgage lenders use this rule to assess your borrowing capacity. If your debt-to-income ratio exceeds these limits, you may have to pay a higher interest rate or you might not be able to get a loan at all.