What Is a Credit Reference on a Rental Application?

What Is a Credit Reference on a Rental Application?

Credit references are documents that verify your credit history. They can come in the form of a credit check report, asset documentation, or character references.

Limited or adverse credit history can potentially impact your rental application. If you have poor payment history, a low score, or little to no history — your chances of getting approved may go down. Landlords or property management companies can approve or deny rental applications based on these references. If this description fits you — don’t fret. There are ways to get a little more creative with credit references.

Rentals are in healthy demand today. So being prepared could give you a leg up if you’re in a competitive market.

General Definition of a Credit Reference

Credit references paint a picture of your borrowing and payment habits and history. Property managers and landlords use it to help determine whether you’re able and willing to pay rent on time and in full.

Documents of financial agreements can be used as a credit reference. They come in the form of credit reports, character references, asset documentation, and credit reference letters. In some cases, letters from personal lenders or documents from a car loan can be used. Be sure to clarify what the landlord needs when applying for an apartment. It’s also helpful to pull together the documents ahead of time, so you can pull together references for multiple apartments at once.

When You Need Credit References

At the end of the day, landlords want to know if you’re able to pay rent. Getting an apartment rental is a business transaction — between two strangers. Credit needed for an apartment plays a key role in rental applications.

Why Landlords Want Credit References

A credit reference is proof of your financial history. They detail how much debt you have, how timely your payments are, and your credit score, among other factors.

For instance, if your credit references show that you’ve been able to pay off your debts in full in a timely manner, a landlord will likely approve your rental forms.

Applicants with less than stellar credit scores or poor payment histories have lower chances of being approved.

Recommended: Does Net Worth Include Home Equity

Types of Credit References

As mentioned, credit references come in different forms, like credit reports, character references, or formal letters from bank loan officers.

Credit Report

The most available type is a credit report. Three major credit boroughs provide credit reports: Equifax, Experian and TransUnion. They are the most used credit bureaus and are required to give a free credit report every 12 months. The credit scoring system, FICO, is used in all three, and differs minorly.

Credit reports contain information like your credit history, current debt, bankruptcies and foreclosures. It can also include the age of your debt and how many credit inquiries you’ve had. Importantly, it’ll also contain your credit score, ranging from 350 to 850.

Landlords will look at this report to determine the financial risk of each applicant. Generally speaking, a credit score of 680 or higher is considered acceptable, though requirements may vary based on the lender or circumstances. Another factor that can impact your credit score and report is the number of inquiries into your credit history. If there are a lot of inquiries it can be perceived as a negative detail by lenders because it has the potential to indicate that you may be struggling financially. Some rental applications will include a fee for running the credit check.

Bad or no credit may give a landlord pause — but it may be possible to strengthen your case.

Recommended: What is The Difference Between Transunion and Equifax

Asset Documentation

Asset documentation is proof of income, liquid cash, or investments. It shows landlords that you are financially stable and able to handle unforeseen circumstances, like a job loss.

Your landlord may request a verification letter from your employer, pay stubs, or an offer letter to prove income. You may also have to provide documentation of your savings or investment funds like mutual funds or retirement plans. Reach out to your financial institution or brokerage to provide you with documents of your accounts.

The more assets you have, the stronger your application will be.

Recommended: What Credit Score is Needed to Buy a Car

Character and Credit Reference Letters

Credit reports and asset documentation only tell part of the story. A character or credit reference letter may give context to a spotty part of your credit history. Someone who you’ve had financial transactions with, such as an employer, previous landlord, or business partner — can write a letter confirming your character and values. For example, if you went through hardship, such as a medical illness, but still met your financial obligations, someone such as a landlord can vouch for you.

If you have bad credit, for example, an institution can demonstrate if you have taken courses, been given resources such as a debt payoff planner, or worked out a new payment plan to successfully pay off your debt. It demonstrates a commitment to improving personal finance.

Don’t be afraid to ask for a reference letter — many may be willing to write on your behalf. Remember, however, that these types of letters are not as concrete as credit and asset reports. They work better as supporting documentation.

Financier Support Letters

If you have troubled credit history, a financier support letter from a cosigner on a lease can help. These letters are typically for business owners who need to prove they have the capital to meet rent or buy.

For a lessee, a guarantor would write a letter with context on how they can support your rent if needed. It’s helpful in case you have an adverse credit history. For business owners, the letters would be obtained from financial institutions or financial partners backing a business lease or purchase.

Credit Reference Examples

If a landlord requests written credit reference letters, have a list of people in mind who can type up a quick letter. You could also ask them to type up a generic letter that you can use across multiple applications. Sometimes a property management company or landlord will have their own template — so be sure to clarify which format is acceptable.

A credit reference letter can be brief. But it must include key details such as:

•   Reference full name and contact information

•   Length of relationship

•   Payment history

Additional details may be requested depending on what your landlord requests. Below is a sample template:

   “Dear [Landlord Name]:

   I have known Ben as a tenant for three years. He paid rent ahead of time, was quiet, respectful, and took care of our property. Also, he ended his lease in search of a bigger space. He got his deposit returned in full — so he’s highly recommended as a tenant.”

If you do not have a history of renting, you can ask a financial institution to vouch for you. Here’s an example letter:

   “[ABC Bank] lent $30,000 to Tina Jones in 2004. She made her payments on time and paid off the loan ahead of schedule in 2007.”

If you’re still short a reference, try an employer to vouch for your stability at your current job:

   “Tim has been an employee of ACB Company for 3 years and has been promoted once. Her current salary is $92,000. She’s responsible and puts our clients’ interests first. She will make a great tenant.”

There are even more resources available online such as those offered by Property Club NYC .

How to Secure a Credit or Character Reference Letter

Before you send a mass email to all your contacts…confirm with your landlord what details are needed. If there’s a template letter, that works even better. Once details are confirmed, reach out to your contacts. Be sure to provide them with all the information they need to include in the letter.

There’s no formal process to request a letter from financial institutions. You can go in-person to speak to a banker who can provide you a letter or you can call your bank and ask how to obtain one.

How to Improve the Chances of Getting a Letter

Consider authorizing your institution to release personal information while you are actively applying for rentals. Not doing so could cause delays as the letter goes through the chain of command.

The Takeaway

Landlords want to see that you earn income and honor your debts. Credit references are formal documents that support your claim. They come in the form of concrete records from credit bureaus to character reference letters from employers who esteem your character and prove you have sufficient income.

The ways to obtain these records differ by institution. Credit bureaus are required to provide free reports to individuals yearly. Financial institutions can issue letters — but your best bet is calling or visiting in person to discover next steps. Finally, individual reference letters from former landlords or employers are also valid.

If budgeting is not your strong-suit, a money tracker app can help. SoFi’s Insights app tracks all of your bank accounts and debt accounts in one place. You can see how much you spend in different categories, like restaurants and necessities. And, there is credit score reporting at no cost to you. Best of all, it’s free. Download the app to learn more.

FAQ

What do I put as a credit reference?

That depends. Ask your landlord what documents he or she requires for a reference. It can mean a credit report, bank statements, character reference — or all three.

Who counts as a credit reference?

A credit reference can be someone from a tenant-landlord or business relationship. It can be a representative at a bank who can give a formal written letter of loans or accounts you have with them. It can be a former landlord who can recommend you for being an outstanding tenant. Or, if you have limited or no credit history, a reference can be a current or former employer who can recommend you for strong character.

Why do I need a credit reference?

Most property management agencies or landlords require credit references in order to approve a tenant application. This gives them an idea of your financial history and whether you’ll be able to and willing to pay rent on time.


Photo credit: iStock/damircudic

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL0522010

Read more
Average American Net Worth by Age and Year

Average American Net Worth by Age and Year

The average net worth of Americans is $748,800, according to the Federal Reserve’s most recent Survey of Consumer Finances released in September 2020. Meanwhile the median net worth of American households is $121,700, according to the same Federal Reserve Survey.

Net worth measures the difference between assets (what you own) and liabilities (what you owe). Understanding the average American net worth by age can be useful for comparing your own progress in building wealth.

Recommended: Does Net Worth Include Home Equity

What the Average American Net Worth 2022 Includes

The Federal Reserve collects data on net worth in the U.S. using the Survey of Consumer Finances. This survey is conducted every three years, with the most recent undertaking beginning in March 2022. Findings are typically published in the year following the year the survey was completed.

To understand wealth and economic well-being in the U.S., the Federal Reserve looks at several specific factors:

•   Income

•   Homeownership status and home value

•   Debt (including mortgage debt, credit card debt, vehicle loan debt, and student debt)

•   Assets (including investment accounts, deposit accounts held at banks, vehicles, and business equity)

The Federal Reserve uses net worth as a gauge to measure increases or decreases in overall wealth levels. The Survey also takes into account demographic factors, such as age, race, ethnicity, and level of education.

If you’re interested in calculating your net worth, you’d use similar metrics. For example, you could use an online net worth calculator to enter in your total debts and assets to determine your net worth. When calculating net worth home equity may or may not be included, depending on your preferences. It’s possible to get a positive or negative number, depending on how your liabilities compare to your assets.

Check your score with SoFi

Track your credit score for free. Sign up and get $10.*


Recommended: What Credit Score is Needed to Buy a Car

How the Average American Net Worth Varies By Age

Using the Survey of Consumer Finances as a guide, net worth rises over the average American’s lifetime before gradually beginning to decline. Average net worth is lowest for Americans under age 35; between the ages of 35 and 44, the average net worth makes a sizable leap.

There’s another significant bump that happens between the ages of 45 and 54, then the pace at which net worth increases begin to slow. Once Americans turn 75, their average net worth begins to decline.

This pattern makes sense, however, if you consider what the typical person’s working career and retirement might look like. Someone in their 20s likely isn’t making much money yet. They probably don’t own a home and a lot of what they do make might go to repaying student loans, car loans, or credit cards.

In their 30s and 40s, they may move into higher paying jobs. Their debts may be mostly paid down or paid off so they can afford to buy a home. By the time they reach their mid-40s, they may be in their peak earning years and their home might have appreciated in value since they purchased it.

Net worth growth begins to gradually slow down once they’re in their 50s and 60s. That could be chalked up to moving some of their portfolio into safer investments or beginning to draw down their savings if they’re retired. Once they reach their 70s, they may be spending more of their assets on health care, including long-term care. Or they might have downsized into a home with a lower value.

Age Range

Average Net Worth

Less than 35 $76,300
35-44 $436,200
45-54 $833,200
55-64 $1,175,900
65-74 $1,217,700
75+ $977,600

How the Average American Net Worth Varies Over Time

The Survey of Consumer Finances provides a snapshot of how the average American net worth has changed over time. From 1998 to 2007, for instance, there’s a steady increase in net worth among American households. But between 2007 and 2013, the average American net worth declined. This makes sense, given that the 2008 financial crisis had an impact on millions of American households. Between 2013 and 2019, net worth rebounded sharply.

This begs the question of how much net worth might change again if the economy were to experience another downturn. If home values were to drop or a bear market caused stock prices to dip, it stands to reason that Americans’ might see their net worth fall. There is a silver lining, as economies do recover over time and the impacts may be less for younger investors. But a drop in net worth might not be as welcome for someone who’s close to retirement.

Survey of Consumer Finances Year

Average American Net Worth

2016 – 2019 $748,800
2013 – 2016 $692,100
2010 – 2013 $534,600
2007 – 2010 $498,800
2004 – 2007 $556,300
2001 – 2003 $448,200
1998 – 2001 $395,500

How the Average American Net Worth Varies by State

The Survey of Consumer Finances does not track net worth data by state. But the Census Bureau does compile information on household wealth and debt at the state level.

In terms of what influences the average net worth by state, there are a number of factors that come into play. Some of the things that can influence net worth include:

•   Homeownership rates

•   Property values

•   Employment opportunities

•   Average incomes

•   Access to education and job training

According to the Census Bureau, the median net worth across all states was $118,200 as of 2019. “Median” represents households in the middle of the pack, so to speak, for net worth calculations. Here’s what the median net worth looks like in each state.

State

Median Net Worth

State

Median Net Worth

Alabama $85,900 Montana $190,300
Alaska (B)* Nebraska $99,520
Arizona $126,100 Nevada $93,920
Arkansas $49,990 New Hampshire $243,600
California $200,300 New Jersey $195,200
Colorado $217,900 New Mexico $56,450
Connecticut $173,500 New York $123,900
Delaware $143,700 North Carolina $108,400
District of Columbia $24,000 North Dakota $241,000
Florida $95,770 Ohio $102,800
Georgia $110,000 Oklahoma $80,790
Hawaii $373,200 Oregon $183,200
Idaho $182,400 Pennsylvania $137,800
Illinois $103,500 Rhode Island $83,790
Indiana $84,620 South Carolina $81,150
Iowa $152,800 South Dakota $216,600
Kansas $77,010 Tennessee $70,100
Kentucky $73,150 Texas $90,390
Louisiana $84,850 Utah $170,900
Maine $107,400 Vermont (B)*
Maryland $194,700 Virginia $148,400
Massachusetts $251,000 Washington $170,400
Michigan $117,600 West Virginia $65,920
Minnesota $228,500 Wisconsin $110,400
Mississippi $40,280 Wyoming $171,600
Missouri $70,220

*Note: Where a (B) is entered, that means the base was less than 200,000 households or a sample size of less than 50 so the Census Bureau did not record net worth information for those states.

Recommended: What is The Difference Between Transunion and Equifax

The Takeaway

As discussed, net worth captures the difference between an individual’s assets and their debts. In the U.S. the average net worth varies by location and age. Tracking net worth is something you may want to do monthly if you’re paying off debt. You can use a money tracker app to figure out how long it will take you to become debt-free based on what you can afford to pay. As your income increases you may be able to pay down debt in larger amounts to increase your net worth faster.

You can also use a budget planner app to track net worth, spending, credit scores, and saving in one place. That’s something you can do with SoFi. This free money management tool delivers a snapshot of your finances to your mobile device whenever you need it.

Get started with SoFi today.

FAQ

What is the average net worth by age for California?

The median net worth for Californians is $200,300, according to the Census Bureau. This figure represents the middle ground between California residents of all ages from the highest net worth to the lowest.

What is the average net worth by age for New York?

The median net worth for New Yorkers of all ages is $123,900, according to the Census Bureau. This figure represents the middle ground between New York residents whose net worth is at the highest and lowest end of the spectrum.

What is the average net worth by age for Florida?

The median net worth for Florida residents of all ages is $95,770, according to the Census Bureau. This amount represents the middle ground between Floridians with the highest and lowest net worth.


Photo credit: iStock/Prostock-Studio

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL0522001

Read more
Does Filing for Unemployment Affect Your Credit Score?

Does Filing for Unemployment Affect Your Credit Score?

At some point, there may come a time when you need to ask the question: Does filing for unemployment benefits affect your credit score? The answer is no, fortunately.

Losing your job can be like a kick in the stomach — it can deflate you, and leave you scrambling to figure out what to do next. That last thing that many people need, in addition to firing up a job search, is a hit to their credit score, too. If you do lose your job, many financial professionals will tell you that the first thing you should do, if you qualify, is to file for unemployment so that you still have some income as you revise your resume and start interviewing.

The good news, again, is that you don’t need to worry about a potential ding to your credit, though. More information below!

Recommended: What Credit Score is Needed to Buy a Car

Why Your Credit Score Matters

Your credit score is, in a sense, your financial reputation. It can give lenders or creditors a quick and easy summary of your creditworthiness — or, how likely it is you are to pay back a loan on time and in full. Everyone has a credit report, and you can think of your credit score as a truncated version, or sort of like a Cliff Notes, to your credit score.

So, why does your credit score matter, then? Because it’s used by lenders to gauge how risky you are as a borrower. It’s used to measure not only whether a lender would be willing to give you a loan, but how much they’d charge you for the privilege; or, what the effective interest rate would be for borrowing.

When it comes to some of life’s bigger purchases, such as a car or a home, that can be very important. A couple of percentage points can mean that a borrower ends up paying tens, or even hundreds of thousands of dollars more in interest over the years. As such, when a lender sizes up your credit application and takes a look at your credit score, the higher, the better.

As for what factors affect your credit score? It’s a mixture of things: Your payment history, total debt balances, credit utilization, credit history (how long you’ve had accounts), credit mix, and inquiries from lenders.

Recommended: Should I Sell My House Now or Wait

Unemployment Won’t Appear on Your Credit Report

Again — you may be concerned that if you lose your job, filing for unemployment may affect your credit score. And, again, there’s no cause for concern. Not only will filing for unemployment not affect your credit score, it also won’t appear on your credit report. Your credit report contains information relating to your past borrowing activity, not your employment status.

So, unless there’s been a change in your credit history — say, you apply for a new line of credit, or close an old credit card — your credit report won’t change. That said, your credit report may contain information relating to past employers, but the only thing that should have an effect on your credit score will be items relating to financial accounts.

That may become an issue if, say, you were issued a company credit card at a previous job. But for most people, your employment status, or past employers, aren’t likely to have an impact on your credit report or credit score.

Remember: Your credit score is a snapshot of your financial reputation, not your employment status!

How Unemployment Can Affect Credit Scores Indirectly

With all of that in mind, your employment status — or filing for unemployment — may have an effect on your credit score in an indirect way.

As mentioned, your employment status isn’t a part of your credit score’s calculation, and neither is whether or not you received unemployment assistance. It’s really all about paying back or down your debts, on time, and on schedule. As such, if you do lose your job and file for unemployment, you may find yourself in an income crunch; your unemployment check is most likely going to be smaller than the paycheck you’re accustomed to receiving, and that may make it difficult to keep up with your payments.

You may also be tempted to start using your lines of credit more while unemployed as a way of making ends meet. For example, you might start using your credit card at the grocery store as a way of keeping money in your bank account, with the thought that you’ll pay off your balance once you get another job and a regular paycheck again. Some individuals may also look into personal loans for unemployed persons, too.

That logic may not be faulty, but doing so, you will increase your credit utilization and overall debt, which can lower your credit score.

Finally, if you find that you can’t keep up with your minimum payments due to the resulting cash crunch of losing your job, that, too, will ding your credit score. That’s why it’s important to maintain a line of communication with lenders. If you can’t make your payment, let them know, and they may be willing to work with you.

And, remember, if you do have a company credit card or some other type of financial account with an employer, and you lose your job, that credit line could be severed. That, too, could affect your credit score, as it ultimately lowers your total available credit.

Recommended: What is The Difference Between Transunion and Equifax

How to Protect Your Credit Score When Unemployed

As for protecting your credit score while unemployed, the most important things you can do are to try and keep your debt balances low and to keep an open line of communication with your creditors. Of course, a loss in income will probably spur you to change your spending habits (by cutting back in certain areas), but in terms of maintaining your credit score, the best course of action is to keep doing what you’re doing: making your payments.

That means continuing to make your payments (at least the minimum) as scheduled. And, since it bears repeating, if you’re going to struggle to make those minimum payments, call your lender and let them know. Some will be willing to make accommodations (forbearance, extensions, etc), perhaps by deferring payments, although there’s no guarantee.

If you feel that you need more help, you can also work with a credit counselor to help you evaluate your options, and even negotiate with your lenders. You may also want to set up free credit monitoring, too, so that you can see any changes to your score. A money tracker app may be helpful as well.

The Takeaway

If you lose your job and file for unemployment, there shouldn’t be a direct effect on your credit score. That said, there may be indirect factors that could lower your score, but the most important thing you can do to maintain a strong credit score is to keep making your payments, and try to keep your debt balances (or credit utilization) to a reasonable level.

And remember that if you’re really struggling, it may be worth it to reach out to a professional for personalized advice. SoFi can help. Track your money, monitor your credit, get a breakdown of your spending, and more all in one place.

FAQ

Can I apply for a credit card when I’m unemployed?

It’s possible to get a credit card while unemployed, but keep in mind that a creditor’s main concern is whether or not you can make your payments. As such, your approval for a credit card may hinge on your income and other debts or financial obligations.

What If my credit score goes down?

Credit scores go up and down all the time, but if you do experience a fall in your credit score while unemployed, you’ll likely know why — and it’s probably because you missed payments or saw your credit utilization go up. The good news is that you can always work on increasing it again!

What personal information does your credit report include?

The short answer? A lot of it. That includes your name, aliases, birth date, Social Security number, address (and former addresses), phone number, and possibly your employment history, among other things.


Photo credit: iStock/sorrapong

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL0522039

Read more
What Percentage of Income Should Go to Rent and Utilities?

What Percentage of Income Should Go to Rent and Utilities?

A common rule of thumb for renters states that no more than 30% of your income should go to rent and utility payments each month. This guideline dates back to housing initiatives introduced by the federal government in the 1960s.

Deciding what percentage of income should go to rent and utilities is central to making a realistic budget as a renter. The less you can spend on these items each month, the more money you’ll have to fund your financial goals. Read on for more about calculating a housing budget that’s right for you, as well as creative ways to cut your housing costs.

What Is the 30% Rule?

The 30% rule says that households should spend no more than 30% of their income on housing costs, including rent and utilities. This housing affordability advice dates back to the 1969 Brooke Amendment, which was passed in response to rental price increases and complaints about public housing services.

The Brooke Amendment capped rent for public housing at 25% of residents’ income. This measure was designed to offer financial relief to low income households participating in public housing programs. In 1981, Congress increased the 25% threshold to 30%, where it has remained to the present day.

Check your score with SoFi

Track your credit score for free. Sign up and get $10.*


Recommended: Should I Sell My House Now or Wait

What Is 30% Based on?

The 30% rule for housing affordability considers two distinct categories of costs: housing and utilities. For renters, this generally means rental payments and basic utilities such as electric, water, and heating. Collectively, these expenses should total no more than 30% of a renter’s gross monthly income.

Gross income is what someone earns before taxes and other deductions are taken out. Net income, on the other hand, is what they actually take home in their paychecks. Basing the 30% rule on someone’s gross income versus their net income will result in a higher dollar amount that should be allocated to rent and utilities.

It’s also important to remember that the 30% rule isn’t set in stone. The average monthly expenses for one person will vary depending on your location’s cost of living, optional costs like renter’s insurance, and whether you have a very low or high income.

Calculating the Percentage to Go to Rent and Utilities

Figuring out what percentage of income should go to rent and utilities using the 30% rule is a fairly simple calculation. You’d multiply your gross monthly income by 0.30 to figure out the maximum amount you should be budgeting for rent and utility costs. How complicated this calculation is can depend on how often you’re paid and whether your paychecks are always the same amount.

If You Are Paid the Same Amount Every Two Weeks

If you’re paid biweekly and your paychecks are the same, you can calculate your target rent and utilities in one of two ways. First, you take the gross amount reported on one of your paychecks and multiply it by 0.30. You then double that result to find the monthly amount.

So, say your biweekly gross income is $2,500. Thirty percent of that number is $750 ($2,500 x 0.30). If you double it, then your rent and utilities budget should be no more than $1,500 per month.

This strategy doesn’t take into account the two months in a year that there are three biweekly paychecks, however. If you want to find the average amount to spend on rent and utilities each month, you can multiply your biweekly gross paycheck amount by 26 (for 26 paychecks in one year), divide by 12 (for 12 months), then find 30% of that amount.

So using the $2,500 figure once again, if you multiply that by 26, you’d get $65,000. Divide that by 12 to get $5,417 (rounded up), your monthly pay. Thirty percent of that is $1,625, the amount you’d allocate to rent and utilities per month.

If You Are Paid Varying Amounts Every Paycheck

Pinpointing what percentage of income should go to rent and utilities can be a little more challenging if your paychecks aren’t the same from one pay period to the next. That might happen if you’re paid hourly and work different hours each week, receive vacation or sick pay, or part of your income is based on commissions.

In that scenario, you’d want to look at your annual income in its entirety. You can do that by looking at all of your pay stubs for the previous 12 months or checking your most recent W2 form. Again, you’re looking at gross income, not net pay.

You’d take the gross income for the year, then multiply it by 0.30 to figure out how much of your pay should go to rent and utilities overall. If your gross annual income was $70,000, then your target number would be $21,000 for the year. Divide that by 12 and you’ll find that you should be spending no more than $1,750 per month on rent and utilities using the 30% rule.

How to Reduce Your Rent to 30% or Less of Your Income

Rising inflation and a strong real estate market can send rent prices soaring. As of May 2022, nationwide rent prices were 5.2% higher year over year, according to Census Bureau data. If you’ve done the calculations and you’re spending more than 30% of your income on rent and utilities, there are some things you may be able to do to reduce those costs.

Split the Rent With Roommates

Taking on one or more roommates could ease some of the financial load. Remember, it’s important to have a written agreement in place specifying what percentage of rent and utilities each roommate is responsible for.

Also, determine who will pay the rent and utility bills when everyone is chipping in. For example, one person may volunteer to collect payments from everyone else and then cut a check to the landlord or utility company. Consider using an online budget planner to keep track of household bills and payments.

Recommended: 25 Tips for Sharing Expenses With Roommates

Consider a New Location

Moving is another possibility for lowering rent and utility costs if you’re relocating to an area with a lower cost of living. Rent in rural areas may be cheaper than in a trendy urban center, for example. There can even be significant variation in rents in different neighborhoods within the same city.

Keep in mind that relocating can have its trade-offs. For instance, living in a less expensive area may mean giving up certain amenities you enjoyed in your old neighborhood, like walkability or convenient access to stores and restaurants. And of course, you’ll also have to budget for the costs of moving, which can average $1,250 for a local move or $4,890 for a long-distance move.

Recommended: Cost of Living by State

Work Remotely

Working remotely can have its advantages, including saving money on certain expenses. For example, you may spend less on gas, meals out with coworkers, or office attire.

That said, if you are on a computer all day, you’ll want to take steps to lower your energy bill, such as unplugging at the end of the day and buying energy-efficient lights.

Opting for remote work could also save you money on rent if you’re able to become location-independent. When you’re not tied to a particular city, that frees you up to seek out cheaper areas to live. You could even forgo renting altogether and become a digital nomad. That has its own costs, but you’re not locked in to paying rent to a landlord or utility payments long-term.

Negotiate With Your Landlord

The most effective way to reduce your rent may be to go straight to the landlord and negotiate your rent. Your landlord may be willing to offer a discount or reduced rental rate under certain conditions.

For example, your landlord might agree to reduce your rent by 10% or 15% if you pay six months in advance or agree to a longer lease term. The prospect of guaranteed rental income might be attractive enough for them to offer you a better deal.

You may also be able to get a rate discount by offering to take care of certain maintenance and upkeep tasks yourself. If your landlord normally pays for lawn care, for example, they may be willing to let you pay less in rent if you’re working off the difference by cutting the grass and maintaining the property’s landscaping.

Ask for a Promotion or Find a New Job

Instead of attempting to reduce your costs, you could try a different tactic: Making more money means you can budget more for rent and utility costs.

Asking your boss for a raise or promotion might boost your paycheck. If you hit a dead end, you may consider a more drastic move and look for a higher-paying job. Taking on a part-time job or starting a side hustle can also help you bring in more money to cover rent and utility payments.

What to Consider if 30% Doesn’t Work for You

As noted above, the 30% rule for housing is a somewhat arbitrary number and may not work for everyone. Spending more than 30% of your income on rent and utilities doesn’t automatically mean that you’re living beyond your means, for a variety of reasons.

There are, however, a few actions you can take to streamline your finances and determine what percentage of income should go to rent and utilities.

Try the 50/30/20 Rule

The 50/30/20 budget rule recommends spending 50% of your income on needs, 30% on wants, and the remaining 20% on savings and debt repayment. This budgeting method doesn’t specify an exact percentage or dollar amount to spend on rent and utilities. Instead, those expenses get grouped into the 50% of income allocated to “needs”.

You still need to keep track of your spending to make sure you’re staying within the 50% limit. Using an online budget planner can help you figure out if the 50/30/20 rule is realistic based on your income and expenses.

Pay Down Loans and Debt

Total U.S. household debt reached $15.84 trillion in the first quarter of 2022, according to Federal Reserve data. While a big chunk of that is mortgage debt, Americans also pay a sizable amount of money to credit cards, student loans, personal loans, auto loans, and other debts.

Working to pay off debts can free up more money to allocate to rent and utilities. There are different methods you can use, including the debt snowball method and the debt avalanche.

Look for Cost Savings in Recurring Expenses

One more way to make shouldering higher rent costs easier is to lower your other expenses. Making small changes at home can lead to lower electricity and water bills. Cutting out subscriptions you don’t use, looking for a better deal on car insurance, and eating more meals at home instead of dining out are all simple ways to lower your expenses.

Recommended: Does Net Worth Include Home Equity

The Takeaway

If you’re spending 30% of your gross (before tax) income or less on rent and utilities, pat yourself on the back. You may spend up to 50% on housing if you have no debt and a healthy savings balance. The important thing is to look at your entire financial picture, including your income, debts, and goals, to decide the figure that’s right for you.

Using a money tracker tool like SoFi’s in-app makes it easy to gain insights right from your mobile device. You can see spending breakdowns, monitor your credit, and track debts at no cost.

SoFi displays all of your accounts on one dashboard, so you never lose sight of your financial big picture.

FAQ

What is a good percentage of income to spend on rent?

The 30% rule says that renters should spend no more than a third of their gross income on rent and utility payments. The less you can spend on rent and utilities, the more money you’ll have to fund other financial goals, like saving for emergencies, paying off debt, and planning for retirement.

Is 30% of income on rent too much?

Spending 30% of income on rent may be too much if a significant part of your income is also going toward debt repayment. That may leave you with little money to cover other necessary expenses or discretionary spending.

How much of your monthly income should go to rent?

A common rule of thumb says that roughly one-third of your monthly gross income can go to rent. But if you have substantial savings and no debt, you may be OK with spending a larger percentage of income on rent. On the other hand, if you’re trying to pay off debt or build savings, you may prefer to spend less on rent payments.


Photo credit: iStock/deliormanli

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

SORL0522002

Read more
What Is An HDHP Plan?

What Is An HDHP?

A high deductible health plan, or HDHP, has a higher deductible than other types of insurance plans, as the name implies.

In return for higher deductibles, these plans usually charge lower premiums than other types of health plans.
You can combine a HDHP with a tax-advantaged health savings account (HSA). Money saved in an HSA can be used to pay for out-of-pocket, qualified medical expenses before the deductible kicks in.

An HDHP can be a good, affordable health insurance option for people who are relatively healthy and don’t see doctors or receive medical services frequently.

But these plans may not be the best choice for everyone. Read on for important things to know about HDHPs.

How Does a High Deductible Health Plan Work?

When you sign up for an HDHP, you will pay most of your medical bills out of pocket until you reach the deductible (with some exceptions, explained below).

Your deductible is the amount you’ll pay out of pocket for medical expenses before your insurance pays anything.

Under current law, in order to be considered an HDHP, the deductible must be at least $1,400 for an individual, and at least $7,000 for a family.

But deductibles can be significantly higher than these minimums, and are allowed to be as high as $2,800 for an individual and $14,000 for a family.

As with other insurance plans, HDHPs come with out-of-pocket maximums. This is the most you would ever have to pay out of pocket–that includes your deductible, copayments, and coinsurance (but exclude premiums and medical costs not covered by your plan).

Out-of-pocket maximums for HDHP plans can’t exceed $2,800 for an individual and $14,000 for a family.
Despite the high deductible with HDHPs, some health care costs may be covered 100 percent even before you meet your deductible.

The government requires all HDHPs sold on the federal insurance marketplace and many other HDHP plans to cover a fair number of preventive services without charging you a copayment or coinsurance, even if you haven’t met your deductible.

You can find a list of those covered services for adults , specifically for women , and for children at HealthCare.gov.

How Does an HDHP Work With a Health Savings Account?

When you purchase a high deductible health plan, whether it’s through the federal marketplace, an employer, or directly through an insurance company, you may also open a health savings account (HSA).

You can put aside pre-tax income in the HSA to help pay your deductible or other qualified health care expenses. However, HSA funds typically can not be used to pay for health insurance premiums.

Earnings also grow tax-free in an HSA account, and withdrawals used to pay for qualified healthcare expenses are not subject to federal taxes. As a result, HSAs can result in significant tax savings.

Currently the maximum you can save in an HSA each year and receive the tax benefits is $3,600 for an individual and $7,200 for a family. Some employers make contributions to employee HSA accounts as part of their benefits package.

HSAs are also portable, meaning you take your HSA with you when you change jobs or leave your employer for any reason. Your HSA balance rolls over year to year, so you can build up reserves to pay for health care items and services you need later.

You may contribute to an HSA only if you have an HDHP.

What are the Pros and Cons of HDHPs?

As with any health insurance plan, there are both advantages and disadvantages of HDHPs. Here are some to consider.

Advantages of HDHPs

•  Lower premiums. In exchange for the high deductible, HDHPs typically charge lower premiums than traditional healthcare plans like PPOs.
•  You can combine an HDHP with an HSA. This can help you cover out-of-pocket medical expenses with pre-tax dollars, which make these costs more affordable. And, these accounts never expire.
•  You get the same essential benefits and no-cost preventive care as other plans. HDHPs are required to cover the same types of healthcare expenses as other plans (after you meet the deductible). And, they offer the same no-cost preventive services as their more expensive counterparts.

Disadvantages of HDHPs

•  High out-of-pocket costs due to high deductibles. You will need to pay for medical expenses out of pocket (because of the high deductible), while also paying your monthly premiums.
•  A disincentive to receive care. You might be inclined to skip doctor visits because you’re not used to having such high out-of-pocket costs. Forgoing treatment, however, could cause more serious health problems down the line.
•  Emergencies can be expensive. If you need unexpected care or go to the hospital, an HDHP will not pay anything until you have met your high deductible. This can mean having to come with a significant amount of cash to cover your medical bills.

HDHPs vs. PPOs

A preferred provider organization, or PPO, is a traditional type of health plan that usually has a lower deductible than an HDHP, but charges higher premiums.

With a PPO, you will typically only have to pay a copayment, or “copay,” when you see a doctor or fill a prescription.

For other medical services and treatments, you will likely have to pay out of pocket until you reach the deductible, but that will happen sooner than it would with a HDHP.

Both PPOs and HDHPs typically have a network of providers you can work with to get the best rates.

In a PPO, however, the provider list may be smaller than it is with an HDHP. To get the best rate on your care, members of either type of plan will want to be sure they are sticking to that list.

A PPO may be advantageous if you go to the doctor a lot and/or run into unexpected medical expenses, since you start to get help from the health plan much earlier in the year than you might with an HDHP.

A PPO could end up costing you more, however, if you end up having a year with low medical expenses.

The Takeaway

So are HDHPs worth it? With an HDHP, you will likely pay a lower monthly premium than you would with a traditional health plan, such as a PPO, but you will have a higher deductible. If you combine your HDHP with an HSA, you can pay that deductible, plus other qualified medical expenses, using money you set aside in your tax-free HSA. If you are young and/or generally healthy with no chronic or long-term conditions, an HDHP may be the most affordable option for you.

On the other hand, if you have a medical condition and you make frequent doctor visits, you may find you need coverage that kicks in sooner than it would with an HDHP plan. It can be a good idea to estimate your health expenses for the upcoming year and get a rough idea of how much you will be responsible for out of pocket with an HDHP before you sign up. You might want to use a budgeting app, such as SoFi Relay, which makes it easy to categorize and track all of your expenses in one mobile dashboard.

Health insurance is just one way to protect your budget, but making sure you have insurance on your home can also help you avoid expenses in the future. SoFi Protect and Gabi offer insurance for both renters and homeowners, so you can be sure that your home, and the things inside you care about, are protected.

Check out insurance offerings with SoFi Protect today.


SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Insurance not available in all states.
Gabi is a registered service mark of Gabi Personal Insurance Agency, Inc.
SoFi is compensated by Gabi for each customer who completes an application through the SoFi-Gabi partnership.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOCO21017

Read more
TLS 1.2 Encrypted
Equal Housing Lender