How Much Do You Need to Make to Afford a $1 Million House?

Purchasing a $1 million home represents a significant financial milestone for many individuals. This substantial investment requires a thorough understanding of various financial components beyond just the listed price. Prospective homeowners must carefully assess their financial readiness, considering initial costs, associated expenses, and continuous monthly expenditures. Navigating this process requires a clear picture of income requirements, upfront outlays, and ongoing costs for long-term affordability.

Understanding Income Requirements

Qualifying for a mortgage on a $1 million home necessitates meeting specific income thresholds, which are primarily determined by a lender’s debt-to-income (DTI) ratio. Lenders use the DTI ratio to evaluate a borrower’s ability to manage monthly payments and repay debt, comparing total monthly debt payments to gross monthly income. This ratio has two parts: the front-end ratio, which focuses on housing-related expenses, and the back-end ratio, which encompasses all recurring debt obligations.

Lenders typically prefer a DTI ratio of 36% or less, though some might approve loans with a DTI up to 43% for conventional mortgages. For example, a $1 million home with a 20% down payment results in an $800,000 mortgage. Assuming a 30-year fixed mortgage interest rate of 6.60%, the principal and interest payment would be approximately $5,100 per month. To maintain a 28% front-end DTI ratio, a borrower would need a gross monthly income of around $18,218, translating to an annual gross income of approximately $218,616. This calculation highlights how interest rates directly impact the required income, as a lower rate reduces the monthly payment and, consequently, the necessary income.

Calculating Upfront Costs

Acquiring a $1 million home involves several substantial upfront costs paid at or before closing. The largest is typically the down payment; 20% on a $1 million home amounts to $200,000. Providing a 20% down payment is often recommended to avoid Private Mortgage Insurance (PMI), which is an additional monthly cost for borrowers who put down less than 20% of the home’s purchase price.

Beyond the down payment, buyers should anticipate closing costs, which are fees associated with finalizing the mortgage and home purchase. These costs typically range from 2% to 5% of the loan amount or the home’s purchase price. For an $800,000 loan, closing costs could range from $16,000 to $40,000. Common closing costs include:
Loan origination fees (0.5% to 1.5% of the loan amount)
Appraisal fees
Title insurance premiums
Attorney fees
Recording fees
Escrow fees

Additionally, some prepaid expenses are collected at closing to establish an escrow account for future property taxes and homeowner’s insurance premiums. These funds ensure that these recurring costs are covered as part of the overall mortgage payment.

Factoring in Ongoing Monthly Expenses

Owning a $1 million home involves several recurring monthly expenses beyond the mortgage principal and interest. Property taxes are a substantial ongoing cost, calculated based on the home’s assessed value and local tax rates. These rates vary considerably by location, but homeowners can expect them to be a notable portion of their annual budget, often ranging from less than 0.5% to over 1.5% of a home’s value annually.

Homeowner’s insurance is another necessary expense, protecting the property against damage and providing liability coverage. The cost of this insurance is influenced by factors such as the home’s location, its construction, and the chosen coverage limits, with average annual costs for a $1 million dwelling potentially exceeding $5,000. Some properties are also part of Homeowners Associations (HOAs), which charge monthly fees for the maintenance of common areas and amenities. These fees can range widely, from under $100 to several hundred dollars per month, depending on the services provided.

Homeowners should also budget for ongoing maintenance and repairs, which are inevitable costs over time. A general guideline suggests setting aside 1% of the home’s value annually for these expenses, translating to approximately $10,000 per year for a $1 million home. Utility costs, including electricity, gas, water, and internet, also contribute to the monthly housing budget, with average households typically spending between $400 and $600 per month on these services.

The Role of Credit and Existing Debt

A borrower’s creditworthiness and existing debt obligations play a considerable role in successfully securing a mortgage for a $1 million home. A strong credit score signals financial responsibility to lenders and can significantly impact the interest rate offered on a mortgage. Borrowers with higher credit scores, often 740 or above, typically qualify for more favorable interest rates, leading to substantial savings over the loan’s term. Conversely, a lower credit score may result in a higher interest rate or fewer loan options.

Existing debt also directly affects a borrower’s ability to qualify for a mortgage by influencing the back-end debt-to-income (DTI) ratio. Obligations such as student loans, auto loans, credit card balances, and personal loans are all factored into this ratio. If a borrower has significant existing debt, it can elevate their back-end DTI, potentially limiting the maximum mortgage amount they can qualify for, even if their gross income is substantial. Lenders carefully review an applicant’s complete credit history and overall financial stability, ensuring that the addition of a large mortgage payment remains manageable within their existing financial commitments.