With million-dollar properties becoming more and more common in the US, it’s important for aspiring homeowners to understand what it takes to purchase these high-cost properties. In this article, we’ll explore the income requirements and associated costs of purchasing a million-dollar home.
Understanding the costs of a million-dollar home
What makes some properties worth a million dollars? Location is a key factor, but market trends, features, amenities and desirability all play a major role.
Property prices across regions
Here are some of the factors that affect the cost of housing in the US.
- Regional Variations: Location plays a crucial role in determining the price of a million-dollar home. Redfin revealed that 81% of homes in San Francisco are valued at over $1 million. Urban areas often demand higher prices due to their proximity to amenities, job opportunities, and lifestyle options. Similarly, desirable beachfront or lakefront locations in tourist towns are likely to be pricier than typical residential suburbs.
- Market Trends: Market trends like demand and supply play a major role in determining prices. For example, in California, the demand for homes has exceeded the supply for decades, and housing production has been slow. Areas like San Francisco are also home to plenty of high-paying tech employers that attract high-earning workers. This job market, coupled with high demand and low inventory, is enough to drive up prices significantly.
- Design and features: Even when a competitive market is not in play, some houses are simply expensive because their construction and material costs are high. They may also be uniquely designed luxury homes with additional features and amenities, such as finished basements, guest houses, or pools. Occasionally, the interior and exterior features of these luxury homes may be constructed using high-end materials like marble, granite, or porcelain. Building with these materials can require specialized and more intensive labor. All these factors can inflate the price.
Mortgage financing
Where do you start when you want to purchase a million-dollar home? Financing is the key concern for most buyers. Here’s what to consider:
- Loan Options: Federal Housing Finance Agency (FHFA) conforming mortgages are capped at $806,500, so a normal mortgage typically isn’t enough to buy a million-dollar home. You’ll need a jumbo home loan. These non-conforming loans exceed the FHFA’s loan limits and can go up to several million dollars, depending on the lender. However, they may have steeper requirements than many other mortgages.
- Down Payment: The minimum down payment for a jumbo loan can range from 10% to 30% depending on your lender. The larger your down payment is, the better terms you’re likely to be offered. A 20% down payment translates to $200,000 for a million-dollar property.
- Mortgage Rates: Even slight changes in interest rates can significantly affect the overall cost of a loan. You’ll need to consider your income in the years to come so you can choose between a fixed or adjustable interest rate.
Property taxes, insurance and more
Monthly payments aren’t the only mortgage expenses to think of. Here are some of the other costs associated with homeownership that buyers should know about.
- Property Taxes: Homeowners pay property taxes annually to their local government. The tax levied is usually a percentage of the value of the house. The size and location of your home will play a huge part in determining your tax obligation.
· Homeowners Insurance: Insuring a million-dollar home is essential to protect against potential risks. High-value homes typically require more extensive coverage, such as an HO5 policy, which can be costly. Buyers should factor in the cost of insurance when budgeting for a million-dollar property.
· Mortgage Insurance: Buyers who make a down payment of less than 20% may need to purchase additional private mortgage insurance (PMI).
Salary requirements to afford a million-dollar home
Salary requirements can vary substantially based on factors like your location, your lender’s policies, or your down payment. Consider these factors.
Income thresholds
Since jumbo loans are a risky product for lenders, their standards for debt and income may be significantly higher than usual. However, because lenders can determine their own criteria, they may often show some flexibility to borrowers with great credit or substantial cash reserves.
- Debt-to-Income Ratio: You may already know that your debt-to-income ratio (DTI) is a percentage expression of the sum of your monthly debt divided by your gross income. A higher percentage indicates more debt. While an acceptable threshold will vary with each lender, some lenders may accept a DTI of up to 43%. Still, a lower figure will earn you better terms.
- Minimum Income: Assuming an interest rate of 6%, monthly debt/expenses of around $2,500, and a down payment of 20%, you would need an annual income of $320,800 to afford a $1 million home. In this scenario, your monthly payment would be around $5,520 for a 30-year fixed-rate loan. With a higher down payment, you could manage with a lower salary. (Qualifications may vary based on the lender, the loan, the strength of the borrower and the loan profile. Annual income is showed only as an example and a professional should always be consulted).
Additional costs and considerations
High-end properties come with additional costs that you’ll need to consider.
- Maintenance and Utilities: High-value properties come with ongoing maintenance and utility costs. You may need to pay for regular landscaping to clean and maintain outdoor features like fireplaces or firepits, pools, or outdoor kitchens. Budgeting for these expenses is crucial to ensure long-term affordability and upkeep of the home.
- HOA Fees: Gated communities and planned neighborhoods may offer privacy and security, but they usually come at a cost. You’ll likely be part of a homeowners’ association (HOA) and will pay monthly or annual fees, adding to the overall cost of homeownership. These fees can vary widely based on the HOA rules.
- Closing costs: No matter the size, all mortgages come with closing costs. Closing costs can include expenses like discount points (or mortgage points) as well as additional expenses a lender may charge for processing and handling your mortgage, such as loan origination and appraisal fees. Closing fees can be around 5% of the cost of the house, but can vary based on the included expenses. While the percentage remains the same for jumbo loans, with a million-dollar house, a 5% closing fee amounts to a whopping $50,000.
Financial planning and preparation tips
Once you’ve decided to purchase that million-dollar home, you’ll need to get your finances in order. In addition to preparing for the financial scrutiny that comes with a jumbo loan, you’ll also need to arrange for a down payment.
Saving for a down payment
The down payment is a crucial aspect of homeownership. You may be able to avoid having to pay for mortgage insurance if you make a down payment of more than 20%. A higher down payment may also earn you better terms.
- Strategies: Leverage high-yield savings accounts and certificates of deposit (CDs) to earn interest on your funds while you’re saving for a down payment. Explore additional sources of income if you can and consider setting up automatic savings and cutting unnecessary expenses. Remember that as a jumbo loan borrower, you’ll also need to boost your cash reserves to be approved for the mortgage. Consider working with a financial advisor to improve your investment strategy and maximize returns in a way that fits your needs.
· Timeline: Timing your home purchase can help you take advantage of lower interest rates, but you’ll also need to ensure your personal finances are in order. It’s a good idea to start planning your home purchase a couple of years or more in advance so you can create a savings plan that aligns with your desired home purchase timeline.
Improving credit
Lastly, jumbo loan applicants must contend with higher creditworthiness requirements than those applying for regular mortgages.
- Creditworthiness: Since lenders take greater risks with jumbo loans, their credit expectations are higher too. When you’re planning your homebuying timeline, it’s a good idea to review your credit carefully and take steps to improve it.
- Steps to Improve Credit: Timely payments are an important element of good credit. Automate monthly payments to ensure you never miss a payment date. You can also work to reduce your debt through debt consolidation if necessary. If possible, practice maintaining a low or $0 monthly credit card balance in the months leading up to your mortgage application. Don’t underestimate the importance of checking your credit reports (from all three bureaus) and ensuring they are error-free.
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