How to Afford a Million Dollar Home

By 

Josiah Wilmoth

Updated 

October 21st, 2020

SHARE

Here's everything you need to know about affording a million-dollar home purchase, including what salary you'll need to get a mortgage, how much cash you'll need for a down payment and closing costs, and what your monthly payments will look like.

To afford a $1 million home, most buyers will probably need at least:

  • $225,384 in annual household income to pay for ongoing costs, including monthly mortgage payments, maintenance, insurance and homeowners association fees, and taxes.
  • $224,223 in cash to cover upfront expenses, including a down payment and closing costs.
  • Another $31,548 in cash reserves — the equivalent of six months of mortgage payments — to show your lender you won't default on your loan if you lose your income temporarily.

These benchmarks are somewhat fluid and will vary based on lender requirements. A higher salary usually compensates for a lower down payment — and vice versa.

What annual salary do you need to afford a $1 million house?


Income You Need to Afford a…
Down Payment Level
$1 Million Home
$2 Million Home
$3 Million Home
0%*
$297,768
$574,080
$850,416
5%*
$286,848
$552,132
$817,536
10%*
$275,868
$530,220
$784,668
20%
$225,384
$429,240
$633,192
30%
$207,036
$392,544
$578,148
Methodology: Assumes a 30-year fixed-rate mortgage at 3.12%, annual homeowners insurance equivalent to 0.5% of home value, annual property tax equivalent to 1.1% of home value, and $500 in monthly homeowners association (HOA) fees.*Down payment levels lower than 20% include 1% in annual PMI payments.

As a general rule, you'll need an annual household income of at least $225,384 to afford the monthly mortgage payments on a million-dollar home. However, specific salary requirements depend on factors like your interest rate and the size of your down payment.

A large down payment could reduce your necessary income to $207,036, but a small one could require you to make almost $300,000 a year to cover your housing costs without stretching your budget too thin.

We base our salary estimates on the "28/36 rule," which stipulates that you shouldn't spend more than 28% of your gross monthly income on housing costs — or 36% on overall debt payments, including credit card bills, student loans, and so on.

Looking to buy a home?

Get matched with top agents near you. It’s free with no obligation!

Getting a mortgage on a million dollar home

To qualify for a mortgage on a $1 million home, you'll need roughly $224,223 in cash for the down payment and closing costs, a credit score of at least 700, and enough savings to cover 6-12 months of mortgage payments.

Your mortgage will likely qualify as a "jumbo loan," meaning it exceeds the maximum "conforming" loan limit in your area. The limit is typically $510,400 but extends to $765,600 in some high-cost markets. As you might expect, jumbo loans generally have stricter criteria than conventional and government-backed mortgages.

Typical jumbo loan requirements

Down payment
20%+
Credit score
700+
Debt-to-income limit (including mortgage)
43% of monthly income
Cash reserves
Enough to cover 6-12 months of mortgage payments

Jumbo loans have strict financial requirements because they're riskier for lenders. The government won't back these loans directly, nor can government-sponsored enterprises like Fannie Mae and Freddie Mac "guarantee" them.

Lenders account for this increased risk in one or more of the following ways:

  • Charging higher interest rates and closing costs.
  • Requiring higher down payment and credit score minimums.
  • Ensuring borrowers have substantial cash reserves.

Down payment on a $1 million home

Most jumbo mortgages require a 20-30% down payment. For a $1 million home, that translates to $200,000-300,000.

Note that criteria will vary by lender. You may be able to secure a jumbo mortgage with a smaller down payment, depending on your overall financial situation.

However, there's a tradeoff:

If you put less money down, your monthly payment will go up, and you'll pay more interest over the long term.

Moreover, if your down payment is smaller than 20%, your lender will likely require you to purchase private mortgage insurance (PMI), which protects them if you default on your loan. PMI premiums could hike your total housing costs by hundreds of dollars per month.

Closing costs

Possible Closing Costs on a $1 Million Home Purchase
Loan origination fee
$8,000
Title insurance
$5,000
Prepaid home insurance premium
$5,000
Prepaid property tax
$1,833
Prepaid interest
$1,040
Home inspection(s)
$1,000
Settlement/closing fee
$1,000
Application fees
$500
Title search
$500
Appraisal
$350
Total
$24,223

Your down payment won't be your only out-of-pocket cost on closing day. You'll most likely have to pay transaction-related fees called closing costs, which — depending on your loan requirements — could add up to 2-5% of the initial mortgage balance, or $16,000-40,000 on a $1 million home purchase with a 20% down payment.

Remember that this is just an example; actual fees will depend on your loan details, as well as your negotiations with the seller.

» MORE: Who Pays Closing Costs?

Credit score

Minimum credit score
700+

You'll most likely need a credit score of at least 700 to be approved for a jumbo loan, although it's not unusual to encounter even stricter standards.

Lenders use your credit score to evaluate the likelihood that you'll make your mortgage payments, on time and in full. Because jumbo loans are riskier for the lender, credit score minimums are usually higher compared to conventional mortgages.

Debt-to-income ratio (DTI)

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward monthly debt payments — e.g., credit cards, student loans, car loans, your mortgage, and so on.

If you have a lot of debt before you apply for a mortgage, it reduces your "borrowing power,” or the amount of money the lender will be willing to give you. Lenders set DTI limits to prevent borrowers from taking on too much debt and defaulting on their mortgages.

There's no universal DTI requirement for jumbo loans, but limits are typically in the 36-43% range.

Importantly, just because you meet the minimum DTI requirements for a jumbo loan doesn’t mean it’s necessarily a good idea.

Other Monthly Debt Payments
Minimum Annual Salary You'll Need to...
Qualify for a Mortgage on a $1 Million Home(43% DTI)
Afford a Mortgage on a $1 Million Home(28/36 Rule)
$0
$146,736
$225,346
$1,000
$174,643
$225,346
$2,000
$202,551
$241,933
$3,000
$230,458
$275,267
Methodology: Assumes a 30-year fixed-rate mortgage at 3.12%, a down payment of 20%, annual homeowners insurance equivalent to 0.5% of home value, annual property tax equivalent to 1.1% of home value, and $500 in monthly homeowners association (HOA) fees.

Some lenders have liberal DTI limits that exceed the commonly recommended "28/36 rule,” which states that your housing costs and recurring monthly debt (credit cards, student loans) shouldn't exceed more than 28% and 36% of your gross monthly income, respectively.

Homeownership brings lots of "hidden costs," and devoting too much of your monthly income to your mortgage payment risks turning your dream home into a financial nightmare.

It's usually a good idea to pay down high-interest consumer debt before saving for a down payment and applying for a mortgage. Not only will it help you afford a larger house payment, but it may also raise your credit score — potentially letting you secure a lower interest rate on your mortgage.

Cash reserves

6 months of mortgage payments
$31,548
12 months of mortgage payments
$63,096

Many lenders require that jumbo loan applicants have the equivalent of 6-12 months of mortgage payments in savings — roughly $31,548-63,096 for a $1 million home. This cash buffer ensures you have enough funds in your bank account to keep making house payments if you lose your job or encounter other unexpected financial difficulties.

Note that this requirement comes in addition to the cash you’ll need to cover your down payment and closing costs. Consequently, you could need to save up a total of at least $255,771 to get approved for a mortgage on a million dollar home.

Monthly mortgage payment on a $1 million home

Down payment
20%
10%
Principal and interest
$3,424
$3,853
Homeowners insurance
$417
$417
Property taxes
$917
$917
Homeowners association (HOA) fees*
$500
$500
Private mortgage insurance (PMI)
$0
$750
Total
$5,258
$6,436
Methodology: Assumes a 30-year fixed-rate mortgage at 3.12%, annual homeowners insurance equivalent to 0.5% of home value, annual property tax equivalent to 1.1% of home value, and $500 in monthly homeowners association (HOA) fees.*HOA fees usually aren't included in the mortgage payment you send to your lender, but we included them here since they factor into your overall housing expenses.

A typical borrower should expect to pay around $5,258 in monthly mortgage payments on a $1 million house, assuming they put 20% down and have an excellent credit score (750+).

Actual mortgage payments will vary based on factors like:

  • Down payment size
  • Length of your mortgage term
  • Interest rate
  • Where you live
  • Size and condition of the home
  • Whether you're subject to an HOA

Principal and interest

The two primary components of your monthly mortgage payment are principal and interest. Principal is what you owe on your mortgage. Interest is the fee you pay the lender for loaning you the money to buy the house.

The most effective way to lower your mortgage payment is to choose loan options that reduce the amount of principal and interest you pay each month. However, lowering your monthly payment may actually increase the total cost of your mortgage.

Get a lower monthly mortgage payment by...
  • Making a larger down payment to avoid PMI
  • Shopping for a lower interest rate
  • Choosing a longer mortgage term (i.e., 30 years instead of 15)
Reduce the total cost of your mortgage by...
  • Making a larger down payment
  • Shopping for a lower interest rate
  • Choosing a shorter mortgage term (i.e., 15 years instead of 30)
  • Making extra principal payments

Two things that will lower your monthly payment and the total cost of the mortgage are:

  1. Making a large down payment
  2. Shopping around for a low interest rate

Making a small down payment could cost you a titanic amount of money over the life of your mortgage, potentially more than $100,000 on a $1 million home purchase.

Here's what the "true cost" of a $1 million home — the purchase price plus total mortgage interest — might look like based on different down payment sizes:

Down Payment
Total Interest Paid
"True Cost of $1 Million Home"
0%
$541,172.42
$1,541,172.42
5%
$514,113.80
$1,514,113.80
10%
$487,055.18
$1,487,055.18
20%
$432,937.94
$1,432,937.94
30%
$378,820.70
$1,378,820.70
Methodology: Assumes a 30-year fixed-rate mortgage at 3.12%. Only accounts for principal and interest. Does not include private mortgage insurance (PMI) or any other housing-related costs.

Homeowner’s insurance

Expected Monthly Cost
High estimate
$417
Low estimate
$292

Annual homeowners insurance premiums could cost $3,500-5,000 on a $1 million house, but rates will vary tremendously based on the size, age, and condition of your home.

Another important factor is whether you live in an area prone to specific natural disasters like floods or earthquakes. If so, you may need to purchase additional coverage to address these threats, which will increase your overall insurance cost.

Homeowners insurance premiums are typically included in your monthly mortgage payment, as are property taxes and private mortgage insurance fees. The lender will hold those funds in escrow and then pay the bills on your behalf when they come due.

Property taxes

Expected Monthly Cost
High estimate
$2,058
Low estimate
$225

"Effective property tax" rates — your annual tax bill divided by the approximate value of the home — range from as high 2.47% ($24,700 on a $1 million house) in some states to as low as 0.27% ($2,700) in others.

Property taxes are levied and collected at the local level, typically by your city or county government — and sometimes both. Rates change frequently, as often as every year or two in some jurisdictions.

Note that you'll pay taxes based on the local government’s annual assessment of your home’s value, which may not be the price you paid for it or what you think it's worth.

Private mortgage insurance (PMI)

Down Payment Percentage
Monthly PMI
Total Monthly Mortgage Payment
0%*
$833
$6,947
5%*
$792
$6,692
10%*
$750
$6,436
20%
$0
$5,258
30%
$0
$4,830
Methodology: Assumes a 30-year fixed-rate mortgage at 3.12%, annual homeowners insurance equivalent to 0.5% of home value, annual property tax equivalent to 1.1% of home value, and $500 in monthly homeowners association (HOA) fees.*Down payment levels lower than 20% include 1% in annual PMI premiums.

If you put less than 20% down on your home, your lender will likely require you to purchase private mortgage insurance (PMI), which could cost 0.3-1.15% of the loan amount annually.

PMI protects your lender in case you default on your loan, so rates could be higher if your credit score or history categorize you as a risky borrower.

Once your mortgage's loan-to-value (LTV) ratio drops below 80% — the equivalent of making a 20% down payment — you can request that your lender cancel your PMI policy. The Homeowners Protection Act requires lenders to automatically terminate PMI once your LTV reaches 78%.

Hidden costs of owning a million dollar house

Expense
Expected Monthly Cost
Maintenance
$833-3,333
Utilities
$1,120
HOA fees
$0-1,000+

Total: $1,953-5,520+

One reason it's foolhardy to purchase the most expensive house you can technically "afford" is that homeownership is littered with expenses that don't show up in your mortgage payment. For a million-dollar home, these hidden costs could add up to more than $5,550 every month.

Maintenance

Expected Monthly Cost
High estimate
$3,333
Low estimate
$833

Maintenance expenses on an ordinary $1 million house could average $833-3,333 per month, although costs will fluctuate and increase over time as the house ages.

Most personal finance experts recommend setting aside 1-4% of your home's value annually to cover the cost of maintenance and repairs. That equates to as much as $40,000 for a $1 million home, not including the price of any additional renovation projects you plan to undertake.

Maintenance is the largest hidden expense most homeowners encounter — and the one most likely to take them by surprise. Buyers consistently rank upkeep costs as their biggest regret about their purchase, even above taking on a mortgage payment they can't afford.

Utilities

Expected monthly cost
$1,120

U.S. homeowners spend a median of $1.68 on utilities annually for each square foot of living space, according to research from Trulia. So, if you purchase an 8,000-square-foot mansion, prepare to write a check for about $1,120 to the utility company every month.

Homeowners association (HOA) fees

Expected monthly cost
$0-1,000+

Homeowners association fees — which fund the cost of shared amenities like neighborhood pools and security patrols — are another wildcard you might need to factor into your budget.

While a palatial country estate might not be subject to any HOA regulations, a house in a luxury neighborhood could require residents to pony up $1,000 or more in fees every month.

Future tax and insurance rate increases

If you have a fixed-rate mortgage, your combined principal and interest payment will stay the same for as long as you have the loan. However, increases to your property tax bill and homeowners insurance premium will likely cause your monthly mortgage payment to get larger over time.

Your property taxes will rise if the government raises the tax rate or decides your home has appreciated in value. Insurance premiums increase due to factors such as a rising occurrence of natural disasters — which makes your house riskier to insure — and inflation, which makes it more expensive to rebuild.

Limits on the mortgage interest tax deduction

Initial Mortgage Balance
"Lost" Tax Savings in First Year
$800,000
$785
$900,000
$2,354
$1,000,000
$3,923
Methodology: Assumes a 30-year fixed-rate mortgage at 3.12% and a combined federal and state tax rate of 40%.

Homeowners who itemize deductions on their federal income tax returns can deduct mortgage interest payments — but only up to a maximum of $750,000 in loan principal.

In other words, if your loan amount is $1 million, you won't be able to deduct the interest on the $250,000 that exceeds the $750,000 limit.

Depending on your income, that could translate to $3,923 or more in "lost" tax savings during your first year owning your home.

Future cost to sell your $1 million house

Cost to Sell a $1 Million House
Pre-listing expenses, closing costs, and other fees
Up to $90,000
Realtor commission
$40,000-60,000
Total cost to sell:
Up to $150,000

Many people justify purchasing homes they can't really afford by assuming property values will continue rising and they'll rake in a huge profit when they decide to sell.

There are three big problems with this logic:

  • There's no guarantee property values will go up.
  • Even if they do, they may not outpace inflation and the costs of homeownership.
  • Selling a house is expensive!

The average cost to sell a house is around 10-15% of the final sale price, plus whatever it costs to pay off the remaining mortgage balance.

To sell a $1 million home, you should expect to pay roughly $100,000-150,000 in pre-listing expenses, closing costs, realtor commission, and other fees.

If you haven't built a substantial amount of equity by the time you sell your house, you could actually lose money on the transaction.

Hopefully, your home value will have increased, but there's no guarantee it will have climbed high enough to offset your home-selling expenses.

» MORE: How Much Commission Does a Realtor Make On a Million-Dollar House?

Should I buy a $1 million home?

As long as you can afford a million-dollar home, the decision to purchase one really depends on your lifestyle and financial goals.

That said, purchasing a $1 million house might be a poor financial decision if you can't afford a down payment of at least 20%. The additional interest and PMI will likely cost you $100,000 or more over the long-term, and the elevated monthly payments will make it harder for you to put your income to work in other wealth-building investments.

Before purchasing any home, we recommend:

  • Crunching the numbers with a financial advisor to determine what size mortgage payment you can afford.
  • Shopping loan options and getting pre-approved for a mortgage.
  • Finding a realtor who can help you navigate your local market and find the right home in your price range.

Next Steps: Talk to an expert!

If you're looking to buy or sell a house and weighing your options, Clever can help!

Our fully licensed Concierge Team is standing by to answer questions and provide free, objective advice on how to get the best outcome with your sale or purchase.

Ready to get started?

Give us a call at 1-833-2-CLEVER or enter your basic info below. Our Concierge Team will be in touch shortly to help.

Remember, this service is 100% free and there’s never any obligation.