What Is Household Income?
Household income is the total amount of money earned by all members of a particular home above a set age limit.
Household income sources include wages, salaries, investment dividends, retirement savings, welfare support, social security payments, food stamps, freelance work payments, interest income e.t.c. as such it is a broad spectrum income index.
Financial institutions gauge the safe limits to the amount that can be lent to a customer by this metric as a risk measure and economic experts can assess a nation’s overall living standards by this means.
Cohabitants in a housing unit do not necessarily have to be related to being classed as a group.
Household income is a frequently quoted econometric and it differs from family income in that it accommodates single person arrangements unlike in the family income case.
Median household income is found to be generally less than family income due to this.
A salient difference also lies in the fact that family income is measured for members who are related by birth, marriage, or adoption.
To estimate countries whose citizens enjoy high-quality lifestyles, it is important to compare median household incomes.
The Gross Income (earnings left after tax) is used in measuring household income at an individual level.
The Affordable Care Act (ACA), also referred to as Obamacare, treats household income slightly differently.
It is classed together as family income in this regard and it grosses the income of the household head (and spouse, if jointly filed) as well as anyone termed as ‘dependent’.
Household Income Example
Banks determine amounts that can be borrowed by individuals with the aid of their respective household incomes as will be illustrated below:
- If ‘A’ wants to buy a flat but currently lives alone with an annual household income of $60,000 with excellent credit, a vehicle loan, and a student loan to repay, his/her total debt-to-income ratio will be found to be above the benchmark of 43%, the maximum allowed percentage to qualify for a mortgage.
No bank will give ‘A’ mortgage.
- If ‘B’ earns the same $60,000 with a significant debt profile and has a housemate who earns $40,000 annually, thus raising the household income to $100,000, the debt-to-income ratio gets lowered significantly and ‘B’ becomes eligible for consideration.