Maybe you just bought a house or you are looking for one. Maybe you feel like you’re living check to check and can’t figure out why. Maybe you just want to know where you stand.  Let’s figure out how much you’re family spends on what is probably its biggest expense: housing.

Most people spend between 25-30% of their gross or pre-tax monthly income on housing. Gross means the amount of money you earn before taxes and benefits are taken out and housing means your rent or mortgage (including HOA or condo fees if those apply). It does not include utilities, property taxes, or insurance.  If your utilities are included in your housing payment, make sure your housing payment is not more than 33% of your gross or pre-tax income.

Let’s take an example:

• Spouse 1 – annual salary before taxes: $75,000
• Spouse 2 – annual salary before taxes: $85,000
• Total household GROSS income: $75,000 + $85,000 = $160,000
• Total Monthly GROSS income = $160,000 divided by 12 (months per year) = $13,333
• 25% of $13,333 = $3,333 and 30% of $13,333 = $4,000
• Housing costs per month should be between $3,333 and $4,000

If you want to include your property taxes, utilities, or insurance, it will add a couple of percent. Your housing costs percentage should still be around 30% (not more than 33%) if you include taxes, utilities, and/or insurance.

If you are looking for a mortgage, one of the tests your lender will do is called a housing expense ratio (sometimes called a front ratio).  Most lenders require you to spend no more than 28% of your gross or pre-tax income on a mortgage (that’s a mortgage alone without taxes, insurance, or utilities).

Spending 25-30% of your pre-tax earnings on housing is a pretty safe bet.  You should have enough left over for food, transportation, medical insurance, and a little bit of fun.