How much is too much to spend on rent? That amount is different for
everyone, but the percentage of income that should be relegated to rent
is pretty standard.
“Chances are if you are renting
you are spending too much of your income on your monthly housing
expense,” according to mortgage expert Kevin Pierce from Mid America
Mortgage. “There is a long-standing ‘rule’ that a household should not
pay more than 28% of their income on their rent or mortgage payment.
This percentage allows the household to save money for the future while
comfortably covering other expenses.”
That rule, known
as the 28/36 rule, also states that a household should spend “no more
than 36% on total debt service, including housing and other debt such as
car loans,” said Investopedia. “This rule is used by mortgage lenders
and other creditors to assess borrowing capacity, the premise being that
debt loads in excess of the 28/36 parameters would be difficult for an
individual or household to service and may eventually lead to default.”
Landlords
may also use calculations similar to this to qualify renters—and some
cap that amount even lower, at 25%, said Quicken. Although, if you look
at nationwide data, it appears that renters are significantly
“cost-burdened, meaning they spent more than 30% of their monthly
incomes on rent” last year, said ApartmentList.com, according to Pierce.
Their data from 2017 shows 49.5 million renters in this precarious
financial position, accounting “for nearly half of all renter households
in the country.”
For many renters, especially in
popular cities and nice places, it’s just not possible to live within
those means. Another survey, this one from Rent.com, focused on 1,000
millennial renters between the ages of 18 and 34, and found that more
than half are overspending and “nearly 1 out of 5 of the renters
surveyed said that over half of their income went to paying rent each
month,” said Forbes.
The immediate issue here is the
fact that spending all that money on rent leaves many people feeling
stressed and pressured just to make enough to pay the landlord every
month. Staying in a rental situation and paying someone else’s mortgage
every month when they could be earning equity on their own home stifles
personal economic growth, not to mention creating a glaring lack of
savings, funds for emergencies and retirement, or any ability to change
their circumstance.
This revelation is often the
catalyst for renters to first look into buying a home, and that is often
followed by the shock of finding out that buying may not be out of
reach, like they may have thought. Yes, when it comes to renting vs.
buying, what consumers don’t know could hurt them. Finding out that
buying a home in a particular area could actually cost around the same
as renting, and that down payment and closing cost help may also be
available, is a life-changer.
“Bottom line:
you have nothing to lose by talking with a lender and seeing if you can
qualify for a loan, how much home, if any, you can buy, and how the
payments compare to what you are currently paying in rent,” said Pierce.
“It may inspire a home purchase right now, or one you can work toward
in the future.”
Written by Jaymi Naciri