Can You Really Afford A Million Dollar Home?

    Have you ever wondered how some people can afford million-dollar homes? In this article, we’ll break down the salary needed to afford a $1 million dollar home, and even explore what it takes to afford up to a $1.5 million or $2 million property.

    What is the Salary to Afford a $1 Million Dollar Home?

    The first thing you need to know is that the salary to afford a $1 million dollar house isn’t just about the purchase price. You’ll also need to consider down payment size, property taxes, homeowners’ insurance, the type of financing you’re seeking (conforming vs jumbo), and the overall interest rate environment.

    Interest rates and down payment size are particularly important because they can influence qualifications so much. And given that down payment requirements can vary from as little as 3.0% (for Fannie Mae in rare circumstances) to 3.5% (for FHA) to 25% for many jumbo loans, this factor needs to be weighed strongly.

    Debt Ratios & Loan Limits: Why They Matter

    The second thing you need to consider or understand is debt ratios and loan limits (discussed in more detail below).

    Debt ratios are calculated by dividing your total monthly debt expenses by your gross income before taxes are withheld. Your debt expenses include your total housing payment, including property taxes and insurance, as well as your credit card and car payments (and other “consumer debt” payments you might have). Fannie Mae allows debt ratios up to about 50%, meaning your monthly obligations can be as high as 50% of your gross monthly income.

    But Fannie Mae only applies to “conforming loans” or loans that conform to Fannie Mae’s guidelines, and those loans have strict maximum loan limits that vary from county to county. So, if you are in a county where the loan limit is low, you will likely need to get a “jumbo” loan instead of a conforming loan, and jumbo loans have much stricter debt ratio limits. Most jumbo lenders will not allow debt ratios to exceed 43%.

    Here’s a rough breakdown with some basic assumptions:

    • Annual Household Salary: $250,000*
    • Purchase Price: $1,000,000
    • Loan Amount: $900,000
    • Down Payment: 10% ($100,000)
    • Monthly Property Taxes: $1,250 ($15,000 per year)*
    • Homeowners Insurance: $167 ($2,000 per year)*
    • Private Mortgage Insurance: $225 ($2,700 per year; required because there is less than 20% equity)*
    • Monthly Mortgage Payment: $5,988 (at 7%)* (or $5,396 at 6%* or $4,837 at 5%*)

    If you have no other consumer debts (auto loans, credit cards, etc.), and you are getting a conforming (Fannie Mae) loan, you would need about $15,300 of gross monthly income to qualify for a $1,000,000 home with 10% down (allowing for a 50% debt ratio). $15,300 x 12 months = an annual salary of about $184,000.

    So, you would easily afford a $1mm loan if you have a salary of $250,000 even in a relatively high rate environment. Please also keep in mind that if you have consumer debt like car payments or credit card debt, your income requirements will be larger.

    You can use the affordability calculator below to see what is within your threshold.

    How Do Interest Rates Affect Affordability?

    Interest rates play an enormous role when it comes to qualifying for a $1 million home. Fixed-rate mortgages are generally the go-to for most homebuyers because they offer stability. However, even a small change in interest rates can significantly impact your monthly mortgage payment and the overall cost of your million-dollar home.

    View mortgage rates for April 24, 2024

    What About Qualifying in Very Low Interest Rate Environments?

    When rates bottomed out in 2021, lenders were qualifying buyers with interest rates in the 3% range. Hence, a buyer with a large down payment in an area with low property taxes could qualify for a $1 million home with surprisingly little income. Assuming a 3% interest rate, a 1% property tax rate, and a 25% down payment, a buyer could have qualified for a $1 million purchase with as little as $8,325 per month in income – or just under $100,000 per year!

    What About a $1.5 Million Dollar Home?

    Dreaming bigger? The salary to afford a $1.5 million dollar home will, of course, be higher. It is important to remember that in almost every market in the United States, you will require jumbo financing in this price range unless you make a substantial payment of 25%. But even that will only help you in what are called “high cost” areas – where conforming loan limits are much higher.

    • Purchase Price: $1,500,000
    • Loan Amount: $1,200,000
    • Down Payment: 20% ($300,000)
    • Monthly Property Taxes: $1,875 ($22,500 per year)*
    • Homeowners Insurance: $250 ($3,000 per year)*
    • Monthly Mortgage Payment: $7,984 (at 7%)* (or $7,195 at 6%* or $6,442 at 5%*)

    Using the $7,984 payment (at 7.0%) and the above assumptions, your total housing payment for a $1.5 million home with 20% down would be approximately $10,109 per month. Assuming you have no consumer debt, your monthly income requirement would be about $23,500. This is a salary requirement of about $282,000 per year.

    Can I Afford a $2 Million Dollar Home?

    If you’re setting your sights even higher, the salary to afford a $2 million dollar home would require an analysis similar to the one above. Assuming a 7.0% interest rate,* a 1.5% property tax,* a 20% down payment,* and $325 per month for insurance,* your total monthly housing payment would be about $13,500.*

    This would require about $31,325 of monthly income or about $376,000 of annual income. Keep in mind though that with lower interest rates or larger down payments, the amount of income required will fall significantly.

    How Do Loan Limits Affect Your Home Purchase?

    You might be thinking, “I’ve got the salary to afford a $1 million dollar home, so I’m all set, right?” Not quite. Another crucial factor to consider is the loan limit, which can vary by state and even by county. These limits are set by government-sponsored entities like Fannie Mae and Freddie Mac, and they can significantly impact your home purchase.

    What Are Loan Limits?

    Loan limits are the maximum amount that you can borrow for a mortgage, and they’re set based on the median home prices in a particular area. For example, in areas with lower real estate prices, the loan limits might be considerably less than in high-cost areas like San Francisco or New York City.

    Why Do Loan Limits Matter?

    Here’s the kicker: If the home you’re eyeing exceeds the loan limit in your area, you’ll be stepping into “jumbo loan” territory. Jumbo loans come with their own set of rules, including higher interest rates, and more stringent credit score and debt ratio requirements. And as mentioned above, you will often need a larger down payment for jumbo financing.

    What Can I Do If My Dream Home Exceeds the Loan Limit?

    If the million-dollar home you’re interested in exceeds the loan limit, you have a few options:

    1. Increase Your Down Payment: By putting down more money upfront, you can bring the loan amount within the conforming loan limit for your area.
    2. Opt for a Jumbo Loan: If you have a high credit score, sufficient income, and sufficient funds for a larger down payment, you might qualify for a jumbo loan. Just be prepared for higher interest rates in some cases.
    3. Consider a Different Location: Sometimes, moving your search to a neighboring county with higher loan limits can make all the difference.
    4. Split Your Loan: Some people opt for a “piggyback” loan, which involves taking out a second mortgage or a home equity line of credit (HELOC) to cover the amount that exceeds the loan limit – with the 2nd mortgage “piggy backing” on the first mortgage. 2nd mortgages and HELOCs, however, come with their own risks and have much higher rates than first mortgages, so is avenue is not always the best option.

    Loan limits add another layer to consider in your journey to owning a million-dollar home, but with the right planning, it doesn’t have to be a roadblock. We have mortgage experts available to help answer any questions you might have about the loan limits in the area where you are thinking of purchasing a home.

    Conclusion

    To afford a $1 million home, the salary requirements vary tremendously based on these factors:

    • Down payment size
    • Property tax rates
    • Homeowners’ insurance
    • Type of financing (conforming vs jumbo)
    • Conforming loan limits
    • The overall interest rate environment
    • Monthly consumer debt payments

    In light of the above factors, the salary necessary can vary from $100,000 per year (in very low rate environments with large down payments) all the way up to $250,000 per year.

    Frequently Asked Questions

    What’s the Minimum Credit Score Needed?

    A good credit score can make a world of difference. For a million-dollar home, scores as low as 620 are allowable, but to get the best possible interest rate, you should aim for a score of 780 or higher.

    Do I Need Private Mortgage Insurance (PMI)?

    If your down payment is less than 20% of the home purchase price, you’ll likely need to obtain Private Mortgage Insurance or PMI, which could add hundreds to your monthly payment.

    What Should My Household Income Be?

    Your household income (the total income of all the people who are applying for the loan) should ideally be high enough to comfortably cover all home-related expenses, including the mortgage, property taxes, and insurance, while still allowing for savings and other living expenses.

    This of course was explained above in detail, but the emphasis or reminder here is that lenders can use more than one person’s income to qualify for a mortgage.

    Can I Use Gift Money for the Down Payment?

    Yes, you can use gift money towards your down payment, but there are specific rules and documentation required. Jumbo loans have more stringent requirements when it comes to gift funds, while Fannie Mae and FHA offer much flexibility. Make sure to consult with our team for details.

    Ready to Make Your Million-Dollar Dream a Reality? JVM Lending is Your Trusted Partner

    By now, you should have a better understanding of the salary requirements and financial considerations involved in purchasing a million-dollar home. Whether you’re eyeing a $1 million, $1.5 million, or even a $2 million property, it’s crucial to have a clear financial plan and a trusted mortgage lender by your side – which is where JVM Lending comes in.

    With our expertise in navigating the complexities of high-value mortgages, we’ve helped thousands of buyers purchase their dream home. Our team at JVM Lending is committed to providing personalized solutions that align with your financial goals, ensuring that you’re well-equipped to make this significant investment.

    Get in touch with our team at JVM Lending today to see what you can truly afford. Let’s make your dream home more than just a dream—let’s make it your reality.

    Ready to take the next step? Contact JVM Lending now at (855) 855-4491 or [email protected] to embark on this exciting journey together!

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    *Remember, these are just assumptions. Your actual needs may vary based on your credit score, the area in which you are buying, the state of the real estate market, interest rates, and other factors. Reach out to a mortgage expert at JVM Lending for a customized home purchase scenario and an outline of your potential costs. 

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