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What is household income?
Household income is the total amount of money earned by every member of a single household. Sources of household income include wages, salaries, investment returns, retirement accounts, and welfare payments. Banks use household income to help determine how much to lend to a customer, and it is also used to gauge a nation’s overall standard of living.
To calculate the household income for a single home, total the gross income of each person living in the home who is 15 years old or older, regardless of whether they are related or not. Household income is usually calculated as a gross amount rather than net figure, before deducting taxes or withholdings.
All sources of income are counted — not just wages and salaries — including tips, payments from freelance work, interest income, dividend income, rental income, pension payments, social security payments, food stamps, and any other welfare payments.
Median household income is an economic statistic that represents the median household income of a given city, state, or nation. Economists use measures of median household income to understand the wellbeing and economic health of different areas, and median household income is commonly used to compare the relative wealth of different countries.
Under the Affordable Care Act (ACA) — also known as Obamacare — household income is treated somewhat differently. Also referred to as family income for ACA purposes, household income is the modified adjusted gross income of the head of household (and spouse if filing jointly) plus the adjusted gross income of anyone claimed as a dependent.
Household income example
Banks use measures of household income to decide how much people can borrow. Clarice wants to buy a condo. She lives alone and has a household income of $80,000 per year. Her credit is excellent, but she also has a car loan and significant student debts, so her total debt-to-income ratio is above 43 percent, the maximum allowed for qualified mortgages. No bank will give poor Clarice a mortgage.
Like Clarice, Hannibal earns $80,000 per year and carries a signifiant debt load. However, another member of Hannibal’s household earns $75,000 per year and doesn’t have any debt. Their combined household income of $125,000 lowers their debt-to-income ratio, allowing them to get a mortgage.
Is your household income high enough to afford a mortgage? Use Bankrate’s house calculator to find out.