What Percent of Your Gross Annual Salary Should Go to Rent or Mortgage?
The resolution to stick to your budget sometimes goes right out of the window when you're shopping for a new apartment or house and find that "perfect" place just out of your price range. But your housing cost commonly takes up such a huge chunk of your finances that it is crucial to stay grounded. The most basic way to determine how much of a housing expense you can reasonably afford is by looking at your gross salary for the year.
Other People Are Reading
-
Yearly Housing Expense
-
The yearly housing expense includes all costs directly associated with the proposed living situation. For a home, that includes the mortgage payment, property taxes and upkeep for the property. For an apartment, total housing expense includes the monthly rent, cleaning costs, additional utilities you must pay the landlord and any association or community fees -- common for townhouses and condos.
Gross Salary
-
Gross salary is the amount you take in before an employer deducts taxes. In many cases, the lender or landlord equates gross salary with total earned income, such as wages from a job or self-employment. However, in some cases salary may also include other sources of income, like alimony payments, as long as it is a stable source of funding for the individual. If a co-borrower or co-signer is a party to the agreement, the lender or landlord considers his gross salary as well.
-
What Percentage?
-
The general rule of thumb is that yearly housing expense should not exceed about a third of gross income for the year. Mortgage lenders commonly use a tight requirement of 28 percent -- this is sometimes referred to as the front-end ratio. A landlord commonly uses a range of 25 to 30 percent of gross income to decide if a renter can afford the space.
Up Salary or Lower Rent
-
You have two simple options if your yearly housing expense exceeds the maximum of a third of gross annual salary. The first is to take on additional employment to boost income or look for a higher paying position. The other option is to shop for a more affordable living arrangement. Create a worksheet listing all of the yearly costs involved for each proposed living arrangement to determine if it is in your range. As tough as it is when you see an expensive place that you really like, you have to think realistically about what you can afford at the time to avoid future financial problems.
-
