Household income

What is household income?

Household income is the amount of money earned by every member in a home. Household income plays a role in determining how much money a lender is willing to lend.

Deeper definition

When figuring out household income, you usually look at the gross income, or the amount you earn before taxes and other obligations are taken out.

Although in many cases, household income includes the money earned by anyone in the home who’s earning income, there are some situations where it is defined differently.

For example, if you are figuring out your household income to see if you qualify for a subsidy under the Affordable Care Act, you wouldn’t include the income of your unmarried partner in the amount, unless you have a child with that person and claimed that person as a dependent on your tax return.

But if you and your unmarried partner decide to buy a house together and apply for a mortgage, the lender would look at the combined amount of your gross incomes.

There are some cases when a lender won’t look at the income of another person when deciding if you qualify for a mortgage and how much. For example, if the other person won’t be on the mortgage and won’t be paying rent each month, the lender won’t use that person’s income as part of household income.

In the U.S. the median household income as of 2015 was $56,516. Median means that half of households earn less than that amount and half earn more.

Household income example

Here is an example of how household income can influence the type of loan you get. Person A is considering buying a home on her own. She lives alone and has a household income of $50,000 per year.

Her credit is excellent, but she also has a car loan and student debts, so her total debt to income ratio is above 43 percent, the maximum allowed for qualified mortgages. She isn’t able to get a mortgage.

In another example, Person A still earns $50,000 per year and still has college and car debts. But now she’s married to Person B, who earns $75,000 per year and doesn’t have debt. Their combined household income, $125,000, which lowers their debt to income ratio, so they are able to get a mortgage together.

Is your household income enough for you to afford a mortgage? Use our new house calculator to find out.

 

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