Mortgage

How A lot Earnings Do You Have to Purchase a $ 1 Million Dwelling?

Expect at least $ 100,000 in income for a $ 1 million home

There is no magic formula that says it takes x income to buy a $ 1 million home. Because income is only part of the equation.

With a really strong financial profile – high credit, low debt, big savings – you could afford a $ 1 million home and an income of around $ 100,000.

However, if your finances aren't quite as strong, you may need an income in excess of $ 225,000 a year to buy this million dollar home.

Wondering how much house can you afford? Here's how you can find out.

Check Your Budget For Home Buying (Nov 24, 2020)

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Income to buy a million dollar home

As mentioned above, income is only one factor in your home buying budget.

The purchase price you can afford also depends on:

Debt-Income Ratio (DTI) Credit Score Down Payment Amount Mortgage Interest

We experimented with some of these factors by using our home affordability calculator to show you how much each one can affect your budget.

Major Borrowers – $ 147,000 income required

Our first example shows a traditional “prime” borrower. They have:

A 20% down payment ($ 210,000). Just $ 250 of pre-existing monthly debt. An excellent mortgage rate of 2.75%

This borrower can afford a $ 1 million home with a salary of $ 147,000. Your monthly mortgage payment would be approximately $ 4,100.

High DTI – $ 224,000 income required

Let's leave everything else as in the first example, but Increase the borrower's monthly debt payments to $ 2,500.

For those who make multiple child support payments, this may be more realistic, even if their debts are only average.

And others have this amount of debt payment even without family obligations. Think luxury cars, boats, RVs, and other toys with large tickets.

In this scenario, the income it takes to buy a home for 1.031 million would be $ 224,000.

To afford this home you will need a slightly higher down payment of $ 214,000. And monthly payments would cost around $ 4,220.

Existing debt clearly makes a world of difference in home affordability. Your salary must be $ 77,000 more to buy a similarly priced home.

Lower Credit – $ 224,000 Income Required

In most cases, a $ 1 million purchase price will require a jumbo loan.

To get a jumbo loan, you usually need a credit score of 700 or higher. For example, suppose a borrower has a credit score at the low end of the acceptable range.

A lower loan means they will have to pay a higher interest rate than our previous example. We say 3.0% instead of the 2.75% used earlier.

That same $ 224,000 income will still buy a $ 1 million home, even though the budget is $ 1,005,000 instead of $ 1,031,000 – a full $ 25,000 less.

And that still implies monthly debt payments of $ 2,500.

Let's say you can afford a 50% deposit. Perhaps you have built up a lot of equity as a longtime homeowner. Or maybe you had a stroke of luck.

In your fortunate financial situation, you've probably paid off most of your debt, so we're paying back that figure to $ 250 per month.

If you cut half the price ($ 500,000), you can afford a $ 1 million home on an income of just $ 110,000.

Even lowering it by 30% makes a big difference compared to 20%.

With 30% less, you could potentially afford a $ 1,037,000 home on an income of $ 140,000. Compare that to needing an income close to $ 150,000 if you only cut 20%.

How To Calculate Your Budget For Home Buying

The best way to find out your budget for home buying without contacting a lender is to use a mortgage calculator.

This mortgage calculator can help you find out how much home you can afford based on your salary, down payment, and debt. It also takes into account other factors such as your mortgage rate and estimated property taxes, as well as homeowner insurance costs.

To get the best estimate possible, you need to be as specific as possible in filling out each of the fields.

Annual income – Your gross pre-tax income from all sourcesStatus – Your location can affect the offer. And it will affect your property taxes tooMonthly debt – Minimum card payments plus loan installments plus child support and child support. In other words, all of your inevitable monthly financial obligations. But not things that vary, like food, gas, utilities and so onLoan term – Are you using a 30 year fixed rate mortgage loan or a 15 year fixed rate loan? This has a huge impact on how much home you can affordinterest rate – You will not really know your mortgage rate until you have received credit estimates from multiple lenders. The default setting shown in our calculator is an average rate on the day of your visit. Yours will be higher or lower depending mainly on your credit, down payment, and debt load. Customize it as best you candeposit – Your down payment will affect your interest rate as well as your overall home purchase budget. Let's say you need at least 20% of the purchase price to get approved for such a large loanOther home ownership costs – Estimate the insurance premiums and property taxes of your future homeowners. The numbers in the calculator are state mean values. Add monthly homeowner membership dues when shopping in an HOA area

Remember, a calculator can only give you an estimate. To know if you can really afford a $ 1 million home, you need to get pre-approved from a mortgage lender.

Pre-approval means that the lender has verified your credit, income, savings, and other items in your application.

If you have a pre-approval letter in hand that says you can afford a million dollar home, it is more or less certain. (Unless your financial or mortgage rates change significantly prior to purchase.)

Start Your Mortgage Pre-Approval (November 24, 2020)

Don't forget the cost of owning a home

So far we've only looked at the purchase price of a million dollar home.

We looked at the principal (repaying the amount you borrowed) and the interest on your mortgage. And we've considered your likely property taxes and homeowner insurance policies.

However, there are many other costs associated with owning a home – especially with high quality real estate. And you need to budget these too.

Closing costs

People often think about their home buying budget in terms of down payment. For a $ 1 million home, you will likely need at least $ 100,000 to $ 200,000 saved in this department.

A deposit isn't the only thing you can save for, however. Home buyers must also consider closing costs when purchasing their home.

Closing costs typically start at around 2% of the buyer's loan amount.

So if you borrow $ 800,000 to buy a million dollar home, your closing cost could be $ 16,000 or more. You need to take this number into account when thinking about how far your savings will extend.

Property taxes and homeowner insurance

Home buyers must also consider their future property taxes.

Real estate tax rates are set by the local tax authorities and vary widely depending on where you live.

To give you an estimate of the ballpark, the average national property tax rate is about 1 percent.

That means that a $ 1 million home has a good chance you'll be paying about $ 10,000 a year in property taxes. That's over $ 800 a month.

Do some research on the property tax rates you're looking to buy at and make sure you include those costs in your budget for ongoing housing costs.

Homeowner insurance is likely to be more expensive even for a larger home. The typical homeowner may spend $ 50 to $ 75 a month insuring a standard home.

However, replacing a larger home will cost more if it is destroyed by fire or other disaster. Of course, the insurance company will charge more for a higher risk.

Expect $ 100 to $ 200 a month to insure your million dollar home.

All in all, you're likely paying $ 1,000 a month in taxes and insurance, a sizeable bill that goes beyond paying principal and interest.

Ongoing costs, repairs and maintenance

The bigger your home, the more it costs to run. The larger area and maybe the higher ceilings you loved mean you have more volume to heat and cool. So your electricity and HVAC maintenance bills will be much higher.

A bigger house also means more cleaning and maintenance – and often has a yard that needs to be maintained.

In short, it is not cheap to take good care of a large house. And repairs aren't either. So plan ahead and make sure your home buying budget gives you a substantial cushion in your savings account.

Benefits of Buying a $ 1 Million Home

Your running costs can be higher with a larger house. But the benefits to your wealth should usually also be greater.

According to CoreLogic, property price appreciation rose to a six-year high in the twelve months to September 2020.

During that time, CoreLogic said, house values ​​rose 6.7% year over year.

That said, if your home was worth $ 325,000, you would have added an average of $ 21,775 to your net worth that year.

And for a million dollar house? Prices rose nearly $ 70,000 year over year. So, you're likely to see a nice return on the money you invest in your home.

All of this, of course, depends on property prices continuing to rise. And we all know that they fall very occasionally.

But take a look at this graphic from the Federal Reserve Bank of St. Louis:

Source: US Census Bureau and US Department of Housing and Urban Development, median sales price of homes sold for the US

You can see how rare it is for house values ​​to go down – and how strong the general uptrend is.

You might think real estate is not a bad place to invest $ 1 million.

Today's prices are helping home buyers

There's one other trend that potential home buyers should look out for and that is mortgage rates.

Low mortgage rates make it more affordable. And interest rates today are near record lows.

So if you're in the market for a high-priced home, it's a good time to look into financing.

Check your new plan (November 24, 2020)

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