Home prices are going through the roof, and while a million dollars may sound like a lot of money, and it is, it may or may not buy you the home of your dreams depending on where you live in the country. So, if you’re looking at paying this kind of money for your next place to live, you might be wondering, how to afford a million-dollar home. Let’s find out how to do just that.
How to Afford a Million Dollar Home
There are a number of ways to afford a million-dollar home.
Here are the best to consider.
1. Get a Good Paying Job
It may stand to reason that if you make a lot of money then buying a million-dollar home isn’t all that difficult.
For example, if you are a doctor or an attorney or even an accountant at a large firm, then you should be able to afford a home such as this without too much trouble.
On average, you will need to make between $147,000 dollars to $224,000 dollars per year.
Those are pretty big salaries for sure.
If your credit score is really good you can make on the lower side of that range and get a mortgage.
If your credit score isn’t great, then you will have to make a salary on the higher end of the range to be approved.
So what happens if you don’t make enough to afford a million-dollar home?
2. Win the Lottery
If it were only that easy…
Wouldn’t it be great to win the lottery?
If it is a big enough lottery, then buying a million-dollar house would be a snap.
You wouldn’t even have to worry about the monthly payment or even mortgage rates.
In fact, you could just pay cash for the home and not have mortgage payments at all.
In all seriousness, there are other more practical ways to get you a home in the million-dollar price range.
Let’s take a look at them now…
3. Have a Large Down Payment
If you are buying a million-dollar home your mortgage lender is going to want you to put down 10 to 20 percent.
Keep in mind, if your down payment is less than 20 percent, then you will have to purchase private mortgage insurance.
So, you are looking at a down payment of $100,000 to $200,000 dollars.
That’s a lot of money.
It might be difficult for you to save up that much, but if you can, you should do what you can to put down the two hundred grand at the least.
The more you can put down, the easier it will be for you to get approved for the loan, and the less your monthly expenses will be.
The mortgage rates offered to you will also be less.
The lower the interest rates, or mortgage rates, the smaller your monthly payment will be and the less monthly income you will need to secure the loan.
4. Improve Your Credit Score
Nobody really likes to talk about credit scores.
They are a dry topic and can also be a frustrating one if your credit history isn’t the best.
But it is really important in general and specifically when you are looking at expensive houses to buy.
The worse your credit is, the more money it costs you.
That’s true when it comes to buying a car or getting insurance.
It is also true when buying a house.
Higher interest rates are one of the hidden costs associated with less than great credit.
That means anything you can do now to improve your credit score will pay off with lower interest rates and an easier time of getting approved for a mortgage.
It also means your annual mortgage payments will be less as well.
Not to mention, if your credit score isn’t high enough you will have a very difficult time getting approved for a mortgage at all.
Finally, if you are looking to buy this expensive home, chances are, unless you live in a really expensive area such as New York City or San Francisco, you will need to get a jumbo loan instead of a conventional loan.
The typical cap of a traditional loan is about $510,400 dollars.
If you are financing more than that, you will need a jumbo loan.
The requirements that you will need to meet to be approved for a jumbo loan are much higher than a typical mortgage, so if your credit score is on the low side, you won’t be approved.
5. Pay Off Other Debt
Paying off debt goes hand-in-hand with having a good credit score.
The less debt you have while at the same time the more income you have available, the better your credit score will be and the better you will look to a mortgage lender.
This is called your debt-to-income ratio.
For example, let’s say you make $5,000 dollars per month.
And your monthly payments for things such as your car payment, student loans, credit cards, personal loans, and so on are $2,000 dollars per month.
That means your debt-to-income ratio is 40 percent.
($2,000 / $5,000 = 40%)
Your lender is going to want this number to be 32 percent at the highest and anything below that is even better.
6. Find a Better Paying Job
Okay, maybe you don’t have that high-paying job with the big annual salary yet or maybe you’re just starting out and wondering what you should do for a living.
The sooner you decide you want to live a specific lifestyle or own a big home, the easier it will be to end up in a job where you will have the monthly income to afford your dream home.
You can head to college and get a degree in engineering or in medicine.
Or you can go into real estate in a big market or even start your own business.
The point is, the sooner you make the decision to have a million-dollar home and the younger you make that decision, the more time you will have to make the right decisions to obtain one.
Of course, the nice thing about starting your own business is that you can do so at any age.
That means it is never too late to start down the road to the life, and home, you truly want.
7. Grow Your Savings
Besides your down payment, you will need money for closing costs.
A good rule of thumb for closing costs is between 2 and 5 percent of the purchase price.
For a million-dollar home, after your down payment of $200,000 dollars, your closing costs could be anywhere from $16,000 dollars to $40,000 dollars.
You’ll need that money in cash.
Even after having all that cash, the bank will want you to have even more.
They will look at your savings and want to see that you have between 6-12 months’ worth of mortgage payments in your account in case something happened and you didn’t have the monthly income to make them.
And don’t forget, these payments will also include your insurance cost and property taxes.
Chances are your property tax rate will be pretty high as well depending on where you live and the neighborhood this million-dollar house is in.
The point is, you will want to grow your savings a much as possible before you even start house hunting.
Can I Get a Mortgage with Student Loan Debt?
You can as long as your debt-to-income ratio isn’t too high.
However, if you are looking at buying an expensive home, it makes sense to pay off your student loans before you do.
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Can You Afford a Million Dollar Home?
You need to ask yourself this before you decide to apply for a loan.
Take into consideration your income, your monthly debt payments, and all of the costs of homeownership.
This will help you determine the maximum mortgage you can afford.
Buying a home at any price is a major financial decision.
Take a look at the actual mortgage payments you will have to make.
Here is a free mortgage calculator you can use to get an idea.
Then you will know if you are in the ballpark when it comes to buying a million-dollar home or if you have some more work to do.
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To Sum it All Up:
If you’re looking at buying a million-dollar home, at the very least you will need a high annual income or win the lottery. You will also want to take a close look at your debt, credit score, and your savings. If everything adds up then you should be good to go. If not, see if you can find a dream home for less money.