How to Afford a Million-Dollar Home — The Right Way

By 

Thomas O'Shaughnessy

Updated 

August 29th, 2019

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Can you afford a million-dollar home? If you’ve never stopped to look at the numbers, you might not realize that this dream is within your grasp. Let’s look at what’s involved in a million-dollar home transaction to give you an idea how to reach this not-so-impossible goal.

Updated August 29th, 2019

Buying a million-dollar home sounds glamorous and far out of reach for the average person. However, in some markets (like in California) a reasonable three-bedroom home can cost over a million dollars.

Do you want to live in a place with good jobs, good schools, and a low crime rate? Then you might want to learn how to afford a million-dollar home, depending on where you live.

With the help of a knowledgeable, luxury real estate agent, it might not be as difficult as you might think. We can connect you with a local realtor who deals in luxury real estate to get started.

Still interested in learning more about what it takes to afford a million-dollar home? Check out what you need to know below.

How can you afford a million-dollar home?

The easiest way to afford a million-dollar home is to visit the bank of mom and dad. Then you can rent out a few rooms in your comfortable mansion and make those massive payments each month with some breathing room.

But what if that’s not an option for you (as it’s not for most)?

Then you'll need a steady job (or other reputable source of income), a solid saving ethic, a good credit score, and strong financial assets.

How much do you have to make to qualify for a million-dollar home?

You need to make approximately $220,000 a year to qualify for a million-dollar home. This assumes that you have a strong financial portfolio, i.e. savings in the bank, few or no debts, etc.

Expect a monthly mortgage payment of around $5,000. This payment includes more than just the principal and interest on the loan as there are other monthly expenses that you have to consider.

We’ll break it all down below.

Quick Tip: Get a luxury real estate agent for free. And get money back.

A Clever thing to know...
In 40 of 50 states, home buyers can get a commission rebate from their real estate agent — up to 1% of the total purchase price. On a million-dollar home, that’s a lot of money. But it’s not standard practice. You’ll need to negotiate your rebate upfront.

Meet your agent through Clever and we’ll negotiate for you.
At Clever, not only do we match you with top local real estate agents — including luxury realtors with expert knowledge of high-end properties — we also negotiate rebates on your behalf.

And since you’re the home buyer, it doesn’t cost you anything to work with an agent. The home seller is expected to cover your agent’s commission.

What does a loan look like on a million-dollar home?

When asking for this much money, you can’t take out a regular loan. The threshold varies in but in many areas, the maximum you can borrow is $484,850 according to BankRate as of 2019. In some areas where the average home price is high, the limit goes up to $726,525.

Over this amount, you have to take out a jumbo loan with its stricter lending requirements. Be prepared with a squeaky clean credit history and a high score. Whereas lenders will accept 620 or over for conventional loans, you’ll need a 740 or higher for a jumbo loan. On occasion, you may find a lender willing to accept something as low as 660, but this is uncommon.

Most lenders will also require that you show emergency reserves. Typically they’ll want to see enough liquid assets to pay the mortgage for 6 months. This can be money in savings or another type of liquid investment.

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How much of a down payment do you need?

Lenders tend to be stricter about having a 20% down payment with jumbo loans. If you can reach this threshold, you’ll have your best selection of lenders. However, many mainstream borrowers will work with down payments of only 10%.

Ask around enough and you might even find a few lenders that will accept less. Of course, remember that if your down payment is less than 20% your loan may be subject to private mortgage insurance, which is an added cost. PMI can bump up the cost of your loan by 0.5% to 1% of your home’s value. On a million-dollar home that means $5,000-$10,000 extra each year.

What does the mortgage payment look like on a million-dollar home?

The best fixed mortgage rates on a 30-year loan are currently around 3.6% (as of August 2019). Let’s use 4% in our example to leave some room for those who won’t qualify for the best rate. Plus, it’s always a good idea to leave room in financial calculations.

Assuming you can make the 20% down payment, you’ll borrow $800,000. Principal and interest alone will cost $3,819 a month. Actual monthly costs will be much higher after adding taxes, insurance, and other monthly costs.

What are the tax implications of buying a million-dollar home?

You may be aware that you can deduct mortgage interest on your taxes. However, it is capped at $750,000 for folks that are married filing jointly. If you’re single or filing separately the limit drops to only $375,000. This means you can take a tax deduction on the first $375,000 or $750,000 and the rest offers no tax benefits.

When you itemize deductions you can claim your property taxes, state, and local taxes on your federal taxes. However, the combined amount of all three is capped at $10,000 for taxpayers who are married filing jointly. Single taxpayers get a measly $5,000. With a million-dollar home, it is very easy to exceed these limits.

What other costs come with buying a million-dollar home?

As we hinted earlier, the principal and interest on your loan isn’t the only thing you have to pay each month. You’ll also be responsible for property taxes, homeowner’s insurance, and possibly homeowner’s association fees.

Property tax rates vary widely by location. Local governments get in on the action, so there’s not even a set percentage for each state. In 2019, the most expensive property tax rate of 2.25% is found in New Jersey. Compare that to a median tax rate of a mere 0.18% in Louisiana. Even just 1% on a million-dollar home translates to $10,000 per year — so be prepared.

Homeowners insurance rates is another cost that will vary widely depending on location. For example, hurricane-prone Florida sees a much higher average rate than, say, Vermont. Regardless, expect to pay a higher rate because of the home’s value, perhaps somewhere between $3,500-$4,500 a year.

Finally, depending on your community, you may have to pay homeowner’s association fees. Though HOA fees are typically associated with condos, many neighborhoods have HOAs as well. These organizations may provide and maintain a neighborhood park or swimming pool/lake access as well as a sports area like a basketball or tennis court or playgrounds for the kids.

In a community of million-dollar homes, you can bet that the amenities will be nice, which means your dues may be pricey. There’s no way to give a good estimate as HOA fees can be zero dollars on up to several hundred dollars. Just don’t forget to ask if the home you’re considering comes with an HOA and how much it will cost (or may cost in the future).

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So how much house can you afford? It’s hard to say because the numbers will vary depending on your situation. Your financial portfolio (debt-to-income ratio, credit score, assets, etc.) is unique to you. Plus, different areas come with different costs of living and housing costs as we’ve outlined.

However, let’s give you some ballpark figures. These numbers are assuming a 20% down payment. If you haven’t saved up enough for that yet, your personal numbers will be a little lower.

How much can I spend on a house if I make 60k?

At $60,000 a year, you should be focusing on homes under $300,000. Consider $275,000 as your max but aim for something a little cheaper to give yourself breathing room.

How much can I spend on a house if I make 100k?

With $100,000 a year coming in, you can afford to spend about $550,000 on a home, depending on your area.

How much can I spend on a house if I make 250k?

At $250,000 a year, you can easily afford that million-dollar home you’re dreaming about. In fact, you could potentially spend up to $1.18 million if you don’t have other significant debts.

What’s the best way to purchase a million-dollar home?

Use a knowledgeable luxury real estate agent. While any home buying transaction represents a lot of money, a million-dollar home is something few can afford.

Don’t try to handle the transaction yourself. An error or oversight on your part can cost you thousands of dollars. As a buyer, you don’t pay real estate agent commission anyway. You have nothing to lose by hiring one and everything to gain.

Clever Real Estate is a discount referral agent network that pairs our customers with the top 5% of agents across the country. Our full-service Partner Agent offer a discounted commission of just 1% on homes over $350,000, so if you’re selling a million dollar home, you’d pay only $10,000 in listing costs.

When buying your million-dollar dream home, our Partner Agents are happy to offer Clever clients up to 1% Home Buyer Rebate on transactions over $500,000. On a $1 million dollar home, that means you’ll get up to $10,000 back at closing!

Don’t hesitate to contact us today to learn more about this exciting way to buy a million-dollar home and save money.

Top FAQs About Million Dollar Homes

How can I invest a million dollars in real estate?

Rental properties are an excellent place to invest your money. With a million dollars you could purchase multiple units/properties and rent them out. Depending on the market and the choices you make, you could earn a healthy return.

What if you don’t want to deal with being a landlord? You have a couple options.

First, you can buy the properties and hire a property management company. They’ll handle finding new tenants, taking payments, and more.

For a completely hands-off approach, you can invest in a real estate investment trust (REIT). It’s one step back — you invest in the company that buys and operates the rental properties.

Finally you can take the crowdfunding approach. Online platforms like Fundrise allow you to invest money in real estate enterprises with no more hassle than transferring money.

Since your money is pooled with that of other investors, you can invest with as little as $500. Your return will be less, but Fundrise has averaged between 9% and 12% since 2014. That’s not too shabby for a completely hands off approach to investing in real estate.

How much does it cost to rent a million-dollar house?

As a general rule, landlords charge between 0.8% and 1.1% of a home’s value for monthly rent. Higher value homes tend to rent for a lower percentage because the high monthly cost would scare away too many renters.

Even so, 0.8% on a million-dollar house is a solid $8,000 per month. Of course, the price will vary depending on the local market, taxes and the cost of insurance.