Rules of Thumb (06/25/2015)
We all have different ideas about which budgeting strategies work best for us, but some general guidelines are often helpful when determining a reasonable budget. Guidelines offering ratios between income and expenditures can help you keep numbers in balance, especially if you are considering buying or renting a different home or making major changes such as retirement.
Following are guidelines used by mortgage brokers and other financial professionals to determine a client’s financial health. When you are considering a move, whether you wish to rent or buy, knowing how much home you can afford is essential.
A good way to determine a reasonable monthly mortgage or rental payment is to calculate the sum of all monthly housing costs divided by your monthly gross income. If you are buying, these costs include: principal, interest, taxes, insurance, and any condo fee. If you are renting, these costs would include only rent and insurance. This ratio should be less than or equal to 28%.
To see whether your spending is in check or you are overspending, calculate the sum of all monthly payments, including non-discretionary expenses and mandatory payments (car payments, insurance, credit cards, etc.), plus housing costs, divided by your gross monthly income. This number should be less than or equal to 36%.
To calculate your Debt to Income Ratio, calculate the sum of your annual debt payments divided by your gross income. This number should be less than or equal to 30%.
The 28% and 36% are common mortgage lender standards and are healthy targets for most people. There is certainly room for flexibility, but these ratios can help provide spending principles for you when you are determining your future financial situation.
Posted June 25, 2015