When you’re laying out your budget, housing money is probably a pretty big chunk. After all, shelter is one of the most basic human needs. Before you sign up for a new lease or mortgage, make sure that the monthly payments won’t ruin your financial plans.
As with many financial concepts, there’s a rule to help you figure out a housing budget. According to Julia Kagan of Investopedia, the 28/36 rule should guide you towards calculating how much you should take on in debt and housing costs. A household shouldn’t take on more than 28 percent of its gross monthly income in total housing expenses. That’s 28 percent of your total pay before taxes, or of the combined income of you and your partner. The rule also stipulates that the amount of money you spend on housing combined with what you use to pay down debt or other related fees shouldn’t be more than 36 percent of your gross income.
While some financial rules are more like guidelines, the 28/36 rule is a big part of how lending institutions determine if you get a mortgage or loan. Kagan states that your credit score is often the primary resource for loan decisions, but your personal ratio speaks to how much more debt you can carry. The higher your credit score, though, the more likely it is that loan officers will allow you to add debt over that 36-percent threshold.
The 28/36 rule is good to keep in mind when looking for a place to call home, but sometimes it just can’t be done. Devon Thorsby, a real estate agent and writer for U.S. News & World Report’s real estate section, pointed out that the average rent for a one-bedroom apartment in the U.S. was $1,183. If you live in San Francisco, you won’t be so lucky. The region’s average one-bedroom rent was $3,390 and paychecks don’t always grow to match.
Many property owners in these high-priced markets still have strict earning requirements for applicants. Taylor Glass-Moore, chief operating officer of Zumper, told Thorsby, “In New York, it’s pretty common that a landlord will require your annual income be 40 times your rent and generally above a 650 credit score. In a market like San Francisco, generally they want your rent to be a third of your income [or less].”
Generally, those indicators provide rent estimates slightly higher than 30 percent, still allowing you to save for the future. If you have a higher credit score that could afford you more flexibility in rent with a landlord, Thorsby suggests looking at your housing requirements to determine what’s non-negotiable to make sure you don’t sacrifice quality of life. For instance, an apartment 30 minutes outside of the city might be more in your range, but if you foresee a soul-draining commute, maybe you should consider sacrificing part of your non-essential budget for your state of mind.
When you’re looking for a place to live, make sure that you don’t take off a bigger financial bite than you can chew. Talk to a financial planner if you have concerns about how much you can truly afford for a secure future.