Some people set their sights higher than others. You may be one of those people who wants to make some big achievements in life and get their hands on a big piece of the pie. If you’re wondering, “Can I afford a million dollar home?”, then you’re probably one of the high achievers I’m talking about.
If you have a whole pile of money – I’m talking millions – then you can probably afford to buy a million dollar home now. Or if your net worth isn’t that high but you want to have the house of your dreams, it’s definitely still possible to purchase a million dollar home. And I’m going to let you know what you need to do to make this dream a reality.
- Do You Have to Be a Millionaire to Own a Million Dollar Home?
- How Much Will I Have to Borrow?
- Can I Get a Big Enough Bank Loan?
- How Much Would I Have to Pay?
- Other Costs of a Million Dollar Home
- Ways to Consistently Gain Wealth
- Final Thoughts
Do You Have to Be a Millionaire to Own a Million Dollar Home?
This is a great question, and it really has two separate answers that seem to contradict each other. On the one hand, if you own a million dollar home, then you have a net worth of at least a million dollars. So by definition, you ARE a millionaire!
But do you have to be a millionaire first to buy a million-dollar property?
Of course not. Many people are able to get their hands on million dollar properties with the help of a mortgage. This bank loan can help you get your foot in the door, both literally and figuratively.
But remember that getting a bank loan depends on a whole number of factors. And there are a lot more costs to owning a million-dollar home than just the basic price tag.
How Much Will I Have to Borrow?
If you want to own a million-dollar property and you don’t have that much cash in your pocket, a mortgage is your best bet. Of course, you could try to borrow money from other sources, like friends and family. But unless you have some incredibly wealthy and generous connections, the bank is your best bet.
The question is, how much do you need to borrow?
That all depends on the down payment that you can afford. It’s standard to put down 20% of a property’s value in order to get a loan started. That would represent $200,000 on a million-dollar home. But does that mean you can borrow the other $800,000?
Not so fast!
In most places in the US, a normal loan will not exceed $500,000, though, for some locations, you can get a conventional loan up to $300,000. If you don’t have that much money saved up, then you have two choices: wait and save, or pay more.
A “jumbo loan” is when you offer less than the 20% standard down payment on a property. If you do this, the bank will ask you to pay mortgage insurance of anywhere between 0.5-1% of the property value per year. That’s $5,000-10,000 per year on top of your regular monthly mortgage payments, and over 30 years, that can sure add up!
So, to be clear, you will normally have to pay between $300,000-500,000 as a down payment and then borrow the other $500,000-700,000 from the bank.
Can I Get a Big Enough Bank Loan?
This is the million-dollar question. Literally. The answer depends on your current finances and debts, credit score, and debt-to-income ratio.
To start with, if you hold any significant debts currently, most banks won’t want to lend you money unless you are a very high earner. So if you’re paying off a car loan but pull in an annual salary of more than the car’s value, you’re probably fine.
As for your credit score, the size of your mortgage will define what your score has to be. For a regular loan of not more than $500,000, you typically need a credit score of 620. But if you need a jumbo loan, that number can jump to 680, 700, or even up to 740. On average, a great credit score like 700 will likely secure you the loan.
You can check your current credit score here.
No bank is going to lend you money if they don’t think you have the ability to pay it back. They assess this ability by calculating your debt-to-income ratio, also known as a debt-to-service ratio (can you service or pay back your loan?).
This assessment is simple to calculate…
It is the ratio of your predicted mortgage payments to your annual household income (you and your spouse together, for example). Normally, banks want this ratio to stay under 32%. In other words, if your mortgage payments are 32% or less of your income, you should be able to afford to service this mortgage.
As an example, if your monthly mortgage payment would be $6,400, but your combined income is $20,000, that’s 32%. The bank would be likely to give you a mortgage. But if the payments were over $6,400/month for the same income, they probably wouldn’t.
How Much Would I Have to Pay?
If you’re wondering, “Can I afford a Million Dollar Home?”, what you really have to figure out is your monthly mortgage payments. And if you already have your eyes on a property, you can use this mortgage calculator to figure out a good estimation of your payments.
Let’s take an example to show how the costs break down…
Imagine you want a home that’s a cool $1,000,000. You have enough to pay a 30% or $300,000 down payment, and you manage to borrow another $700,000 from the bank. If you get a 30-year loan at a 6.65% interest rate, you’d need to pay $4,493/month on the mortgage.
Following the 32% rule, you would need:
An annual household income of [(4493 x 12 x 100) / 32] = $168,487 to afford this loan.
This is just an example calculation, and your down payment, interest rates, and loan amount could all be different. But this gives a good idea of the kind of money you need to earn to buy a million-dollar house without putting yourself into financial trouble.
Other Costs of a Million Dollar Home
If you can afford the down payment and you qualify for a loan, you still have a few other costs to consider. A bigger, more expensive home necessarily comes with higher associated expenses. Some of these include:
The tax you pay depends on the size and value of your property, and also where it’s located. You may have to pay something like 1.5% of your property’s value annually, or $15,000/year.
To insure your home, you’re probably looking at about $300/month or $3600/year.
Maintenance and Cleaning
If you have a larger property, it will mean more maintenance and cleaning expenses. This is true whether you hire someone else (labor) or do it yourself (materials).
Decoration and Furniture
More house means more furniture and more decoration to make your space perfect. These costs can add up and need to be in your overall budget as well.
Ways to Consistently Gain Wealth
So, in truth, you must already know this deep down. The only way to become wealthy is to spend less than you earn, and consistently accumulate savings with the rest.
If it was easy, everybody would be a millionaire, right?
For a little perspective, take a look at What Percentage of Americans Are Millionaires. And if you still feel that you have the drive and the will to work your way into that bracket, then we have a lot more to share with you to help get you on track.
In the interim, you can read about How to Make $500 Fast, How to Make Money on Instacart, as well as these Legit Online Side Jobs. All of these sorts of things can at least help you get out of any debt faster and, therefore, position you in the right direction toward owning your million-dollar dream house.
However, if you want to get there faster, then why not look into Careers That Make You Rich and the Best 6 Figure Jobs to Have? We can also take you through these Jobs That Can Make You a Millionaire to give you a few ideas on how others are doing it.
Not so young anymore?
Don’t let that stop you! Find out everything you need to know about a Midlife Career Change in Your 40s.
Where there’s a will, there’s usually a way. So, feel free to make use of our search facility to find the information you need to get you on the road to personal financial freedom.
Ok, back to…
If your dream is to own a beautiful, comfortable, and luxurious million-dollar home, I hope you can achieve it. But you should seriously consider how much you need to make in order to pay off a mortgage for that kind of property.
You also need to have clean finances, a great credit score, and enough for a pretty big down payment. But if you have all these factors in place, or a cool million in your briefcase, then that dream house could be yours!
Here’s to making your dream home a reality!