8 hours ago 2

Here's the salary you need to afford a $1 million home

Depending on where you’re shopping for a home, $1 million could get you a spacious mansion or just your typical, single-family house. For example, in the Los Angeles area, the typical home costs nearly $1.15 million. In Chicago, however, it’s under $400,000 — meaning $1 million could go pretty far in terms of amenities and square footage. Regardless, the price tag is the same — and so is the cost of taking out a mortgage. Exactly how much money would you need to make to afford that $1 million house?

Some general rules apply when shopping for a home. These require knowing how much you make each month (both before taxes and after) and the total of any other debts you pay monthly.

Here are a few different (but common) rules mortgage lenders use when deciding how much you can borrow. The rules refer to the percentage of your income you should put toward mortgage payments.

The 28/36 rule states that you should spend no more than 28% of your monthly pretax income on your housing costs, and no more than 36% on debts in total.
The 35/45 rule states that your total debt payments should not exceed 35% of your monthly pretax income or 45% of your monthly post-tax income.
The 25% rule advises keeping your monthly housing debt total to 25% of your post-tax income.

Assuming a 20% down payment, a 30-year loan term, and a 6.5% interest rate, a $1 million home would require a $5,057 monthly payment toward principal and interest.

Homeowners insurance and property taxes will also make up your payment, but these vary depending on where you buy your house.

Here’s a look at various salary ranges and whether they would allow you to make this payment under the above rules. We’ve omitted the 25% rule, as tax scenarios can vary widely.

Remember that the above scenarios only take into account the amount of money going toward your housing payment. Your best bet is to look at your salary and monthly debts, and multiply them by all of the above ratios. This will tell you if you’d likely be able to qualify for a $1 million home purchase.

You should also keep in mind that the above numbers assume a 20% down payment. If you can’t afford to put this much down, your monthly mortgage payment will be higher. You’ll also have to pay for private mortgage insurance (PMI) with a conventional loan.

In many cases, buying a $1 million home will require using a jumbo loan — especially if you don’t have a 20% down payment. Conforming conventional loans for single-family homes only go up to $806,500 in most parts of the country, though there are some higher-cost markets where limits can reach into the millions.

For example, in Alaska, conforming conventional loans go up to $1,209,750. If you’re not in one of these high-cost markets, then you’ll need to use a jumbo loan, which allows you to take out a loan larger than the conforming loan limit.

Jumbo loan costs and requirements

Generally speaking, it’s harder to qualify for a jumbo loan than other types of mortgages. You will usually need the following:

A large down payment: While conforming conventional loans allow for down payments as low as 3%, you’ll typically need a minimum of 15% down with a jumbo loan.
A higher credit score: You generally need at least a 680 credit score to qualify for a jumbo loan.
Cash reserves: Many mortgage lenders will require you to have at least six months of housing payments saved up in case you lose your job or hit some other financial snag.
A low debt-to-income ratio: You will usually need a DTI ratio of 45% or less for a jumbo loan, meaning your total monthly debt payments — including your projected mortgage payment — total a maximum of 45% of your monthly income.

Using the above DTI ratio, this would mean a borrower with an annual salary of $200,000 would have about $7,500 to work with each month, minus any other debts they owe monthly. For a borrower with a $150,000 salary, it would drop to $5,625.

A quick note: Jumbo loans tend to come with higher interest rates than other mortgage loans, so using one could mean a higher monthly payment than you would see otherwise. This will also impact what salary you need to afford a $1 million home.

Many variables impact the cost of your monthly mortgage payment. These include the lender you choose, the home’s location, your loan type, and other factors.

For the most accurate idea of what salary you need to buy a $1 million home in your area, talk to a mortgage professional. They can run the numbers specific to your financial situation and help guide you toward the right home-buying strategy.

A mortgage broker can act as the middleman to find a mortgage lender that uses the DTI ratio rules that benefit you. You can also contact a loan officer at a specific lender or apply for mortgage prequalification to find out if you earn enough money for a loan on a $1 million house.

Your real estate agent usually gets an idea of your financial situation before starting the house-hunting process, so they may know how much house you can afford and even which lenders would be best.

Learn more: Use the Yahoo Finance home affordability calculator

Assuming a 30-year loan term, a 20% down payment, and an interest rate of 6.5%, a $1 million home would require a $5,057 monthly payment. Keep in mind that this does not include insurance or property taxes, which will vary based on your home, location, and insurance provider.

The 28/36 rule is a rule of thumb many mortgage lenders use to decide how much money they will let you borrow for a house. The rule states that you should spend no more than 28% of your monthly pretax income on housing and 36% on your total debts. For example, if you make $200,000, you should spend no more than $4,667 on housing per month.

Using the 28/36 rule, which says you can spend up to 28% of your monthly income on housing, you would probably be able to afford a $1 million home on a $250,000 salary. This means your monthly pretax income is about $20,833 — $5,833 of which you could spend on housing.