How much should I pay for housing if I own a home?
As mentioned, if you own a home, it's likely you are spending far less on housing than the average renter. But according to most lenders, it's possible you could be spending more.
Mortgage lenders have specific requirements for calculating an applicant's eligibility for a home loan, with debt to income (DTI) being a large contributing factor. The lower the debt in relation to the income, the more home you can afford and the higher your chance of being approved for a home loan.
Many lenders use the 28/36 rule of affordability as a guide to determine how much you can afford. The rule states that your mortgage payment, including property taxes and homeowners insurance, should not exceed 28% of your pretax income and that your total debt, including mortgage and other debts such as credit card, car, or student loans, should be no more than 36% of your pretax income.
Am I spending too much on housing?
If you spend more than 30% of your gross income on housing, which would include your rental cost plus utilities or your mortgage payment plus utilities, property taxes, and homeowners insurance, then it's likely you are spending too much. Historically those who spend 50% or more of their income on housing are considered severely cost-burdened, but there are times when spending more can make sense. If you have very little to no other debts, spending more on housing may be okay because you have more expendable income each year.
You may be in a financial situation where the 30% rule makes sense, but the actual affordability for your housing will vary based on your personal income and current debts. Ultimately, the goal is to keep your housing expenses as low as possible, which leaves more room for building wealth and a financial safety net, investing, and saving for retirement.