How Much Do You Need to Earn Annually to Afford a $1 Million Home?

By Jessica Jones-Gorman
Staten Island Advance, N.Y.
(TNS)

The number of homes in the United States valued at $1 million or more is at a record high. In fact, a recent report from Zillow shows there are approximately 550 “million-dollar” cities scattered throughout the country—locations where the typical home is worth $1 million or more.

So what does it take to afford the mortgage on such a costly purchase? Experts suggest an annual salary of $290,000 or more.

“If you have excellent credit, lots of savings, and don’t have any other debts, you might be able to buy a $1 million home if your gross (pre-tax) annual household income is around $150,000 or higher,” a recent report from Fortune noted. “However, this hypothetical assumes you put 20% down, get a 6.75% interest rate on a 30-year fixed-rate loan, and can qualify and are comfortable with a debt-to-income (DTI) ratio of 50%.”

But most homebuyers do not check all those boxes, Fortune explained. So, a more realistic million dollar home earnings average is somewhere in the ballpark of $290,000 or more.

“Lenders don’t consider your income in isolation,” the Fortune report noted. “Many factors can affect your eligibility, interest rates and borrowing limit.”

According to Fortune, here are some of the common factors lenders consider:

Debt-to-income (DTI ratio): A comparison of your monthly income and debt payments. The more debt you have—housing or otherwise—the higher your income will need to be.
Down payment: The less you put down, the more you have to borrow, which affects your DTI. If you put less than 20% down, you may also need to pay for private mortgage insurance (PMI), which will increase your monthly housing costs.
Credit scores: Your credit scores can affect your eligibility, interest rate, maximum DTI and required down payment. A higher credit score can help you qualify for a loan with a lower interest rate and less stringent requirements.
Interest rate: The loan’s interest rate will impact your monthly payment, which affects your DTI. A lower interest rate will lead to lower housing costs, which means you’ll need less income to qualify.
Savings and investments: Lenders may consider how much money you have in savings, investments and retirement accounts. Large loans may require you to have six to 12 months’ worth of liquid assets, although the amount might depend on your down payment, credit score, and whether you’re buying a primary residence or second home.

The takeaway? A realistic income for a $1 million home that doesn’t leave you strapped for cash is around $210,000 to $270,000.

“It’s still a big range, but when you’re borrowing so much money, even a small change in interest rates can have a big effect on where your monthly payment lands—so it’s better to leave yourself a little wiggle room rather than buying at the absolute top of your price range,” Fortune concluded.

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