Here’s how much you need to earn to buy a $1 million home

The number of homes in the United States worth $1 million or more has steadily increased in recent years. A February 2022 report from Redfin shows that a record 8.2% of US homes (or 6 million homes) are worth at least $1 million. That number is nearly double the number of homes with such a high price tag before the pandemic.

While the overall number of $1 million homes has declined somewhat since then, falling to 6.5% in December, according to a Redfin representative, it’s more than the 4.8% share of luxury home inventory represented by there is no pandemic yet.

If you’re a home buyer in the market for a property in that price ballpark, it’s important to have a clear understanding of what your annual salary will need to comfortably afford. mortgage payments.

While many factors affect the answer to that question—including the amount of your down payment, as well as your debt level and mortgage interest rate—Here’s a general guide to how much income you’ll need to afford a $1 million home comfortably.

The current state of the housing market for home buyers

The housing market has been on a wild ride for several years now, one driven by a variety of factors, including the pandemic, lack of housing inventory, inflation, and continued increase in interest as the Feds try to lower inflation.

Amidst all this, home price growth is slowly starting to cool down, as sales, according to CoreLogic. And that trend may continue throughout the year. The CoreLogic report predicts that on a year-over-year basis, prices will drop by 2.8% between November 2022 and November 2023.

While that may not be good news for sellers, it may be helpful for some buyers who were previously priced out of the market. “With rates declining from their highs in 2022 and remaining stable, buyers are gaining more confidence in the housing market and returning to the table,” said Mason Whitehead of Churchill Mortgagea national lender.

Interest rate projections for the coming year

Interest rates are another important factor affordability of the houseincrease the cost of the month loan pay when they multiply and make more houses budget-friendly when they shrink. During the height of volatility last year, the interest rate increased above 7.

But with the decline in home prices in the coming year, prices are also expected to drop. By some accounts, rates on a 30-year mortgage could drop significantly from the current average of 6.46%, which could be a boon for home buyers.

“I believe that if inflation continues to decline, which I expect it to do, we will see interest rates fall very soon,” said Seth Bellas, a manager at Churchill Mortgage. “It would not be surprising to see the 30-year fixed rate average hover near 5% for the next six months and likely remain there through 2023.”

How much income do you need to buy a $1 million home?

With these market factors in mind, the question remains-how much income you need to pay off the loan in a $1 million house?

To answer that question we spoke with Jack Kammer, vice president of mortgage lending for the nationwide mortgage company OriginPoint.

By Kammer’s estimate, the monthly payment for a $1 million home would be somewhere in the neighborhood of $6,256—a figure based on a home buyer coming to the table with a 20% downpayment and getting a 30-year, fixed-rate mortgage. That monthly mortgage payment estimate is also based on the current national average interest rate of 6.46%, a property tax rate of 1.25%, and a home owners insurance cost of $200 per month.

To qualify for a mortgage in this scenario, you’d need to make between $195,000 and $210,000 in annual salary or $16,300 per month in gross W-2 income, Kammer said.

His salary estimate is based on the fact that mortgage income qualification is calculated based on the applicant’s debt-to-income (DTI) ratio (which is the amount of your monthly income that must be set aside for debt service). Mortgage underwriters Fannie Mae and Freddie Mac allow DTI of up to 45% (or, in some cases, up to 50%) of your gross, pre-tax income. That 45% will include your monthly mortgage payment and all other monthly debt—like car loans, credit cards, and student loans.

And finally, to calculate the salary requirements he identified above, Kammer assumed an average household debt of $1200 per month.

Using all the same information in the example above, but moving the downpayment from 20% to 10%, the monthly mortgage payment on a $1 million home would be $7,295. And in this case, your gross annual income should be $225,000 to $240,000.

“The real question is how much of a down payment you want to take,” Kammer says. “The goal is to only use 28% of your gross or pre-tax annual income toward your home payment. In this market, that’s not a reasonable expectation.”

If you’re considering a $1 million home purchase, the best first step is to talk to a lending professional and run the numbers to confirm how much you can reasonably afford.

Once you’ve done that, it’s time to think carefully about how much of your monthly income you feel comfortable dedicating to a mortgage. “At the end of the day, you’re paying for the house,”

The takeaway

While interest rates and home prices may drop in 2023, a $1 million home purchase is still an expensive proposition. The income needed to make the monthly payments will vary based on your down payment, interest rate, and other factors, but you’ll likely need an annual salary of around $200,000. Before taking the plunge on such a big purchase, talk to a mortgage professional who can help you run the numbers and do a gut check.

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