How to Afford a Million Dollar Home

The PropertyClub Team
Jun 3rd 2020
You have a great job with reliable income, little debt, and plenty in the savings account. As you begin your new home search, you might be wondering: can I afford a million-dollar home? We'll explore how to afford a 1 million property, how much you need to make, and what the typical mortgage and down payment requirements are.

A million dollars used to be a LOT of money, but each year more and more people become millionaires. 1 million dollar homes are becoming more commonplace in major cities across the United States, and in some cities, they are even unavoidable (such as some cities in California). The good news is that you do not have to be a millionaire to afford one. 

There are a variety of reasons someone might want a million-dollar home in the first place. Such houses are often large, comfortable, and feature some additional amenities such as a home gym, mini-movie theater, or a luxurious patio and pool area. These homes are often secluded, offering more privacy. 

Here’s how to determine if a million-dollar home is feasible for you. 

How much do I need to make to afford a million-dollar home? 

If you have a net worth over a million dollars, you might be in a position to purchase a million-dollar home outright. The larger your down payment, the lower your monthly income will need to be to afford a million-dollar home. 

Generally speaking, though, for most people to afford a 1 million dollar home, they will need to make roughly $220,000 per year. This figure alone is not enough to get you a million-dollar home. You will need to make a hefty down payment - you should aim for a 20% down payment, which comes out to be over $200,000 by itself. Additionally, you will need to have clean finances with little debt and a good credit score. 

Again, the larger your down payment, the lower your mortgage payments will be, so a lower annual income could suffice. This, however, would mean that you have enough cash sitting around to make a 50% - 60% - or even 70% down payment. On a 1 million dollar home, that comes out to be a lot of money!

Those planning for retirement might have several hundred thousand, or even millions saved up. They might be able to purchase a lovely million-dollar home and have low enough mortgage rates to keep their current job. 

How do you buy a million-dollar house?

First thing first, you need to qualify for a mortgage. Mortgage availability for a million-dollar home depends on a variety of factors: the size of the down payment, credit scores, and the debt to service ratio. 

What much is the typical mortgage on a million-dollar home? 

Monthly mortgage payments on a 1 million dollar home will depend on several factors, including your credit score, down payment, term, and interest rate. Generally speaking, on a 30-year mortgage with 20% down, you can expect to pay around $4,500 in monthly mortgage payments on a million-dollar home. 

Down Payments on a 1 million dollar home

It is important to remember that most conventional loans have a maximum amount that can be borrowed. According to BankRate, the maximum amount is $484,850 as of 2019, although in some specific locations, the amount available rises to over $700,000. In either case, the only way to receive a conventional loan would then be to make a down payment of over $300,000 in some areas and over $500,000 in the rest. 

Since many people will stick to the average 20% down payment, they will have to qualify for a jumbo loan instead. These come with stricter requirements. 

Anything less than a 20% down payment might subject your loan to private mortgage insurance. This can be an additional cost 0.5% to 1% of the home price each year ($5,000 - $10,000).

Credit Score

Conventional loans look for credit scores near 620 or above. For jumbo loans, however, the minimum rises to 740. Some lenders might accept a credit score of 660 or 680 based on income, down payment, and other factors. It is safe to assume that you will need to be over 700 at the least and likely near 740 to qualify. 

Debt to service ratio

The debt to service ratio is an assessment of the buyer’s financial situation. It is a ratio of annual mortgage payments and other costs to the amount of combined annual household income. Most lenders look for ratios below 32%. 

If you and your spouse have a combined income of $250,000 and the annual mortgage payment and related costs are $75,000, then your ratio would be 30% (75,000 / 250,000). If the annual costs are $100,000, then your ratio would be 40%, and you would likely struggle to find a loan. 

Example Mortgages

Let’s imagine you want a 1 million dollar home and can afford a 20% down payment. Based on current interest rates, your monthly payments would likely land up around $4,500 (mortgage + property tax + heating costs). This amounts to annual expenses of $54,000. 

Assuming you have a sufficient credit score, what would you need to make to meet a 32% debt to service ratio? You would need to make over $168,750 to meet the 32% ratio (54,000 / 168,750 = 32%). 

Now imagine that you have an additional $1500 in monthly expenses - car loans, student loans, and other miscellaneous loans. Now your monthly payments are $6,000, and the annual expenses are $72,000. When lenders consider all your expenses, they are looking at your total debt service ratio. They are a bit more lenient when they consider these other expenses and look for ratios near 40% (32% + 8% to cover all the costs). 

In this case, you would need to make over $180,000 to meet a 40% ratio and afford a 1 million dollar home. 

These two examples are the typical baseline estimation of a mortgage for a million-dollar home. If you can afford a larger down payment, have a higher annual income, and a better financial record, you will likely make lower monthly payments and get more flexible interest rates. 

Since most million-dollar homes end up costing around $1.1 - $1.3 million when all the costs are considered, the $220,000 annual income mark is a safe bet for you and your family. As long as you have clean finances and can afford a hefty down payment, you will be well on your way to purchasing a million-dollar home!