The number of homes in the United States valued at $1 million or more has steadily increased in recent years. A February 2022 report from Redfin showed that a record 8.2% of U.S. homes (or 6 million homes) were valued at $1 million or more. That figure was nearly double the number of homes with such a steep price tag prior to the pandemic.
While the total number of $1 million homes has decreased somewhat since then, dropping to 6.5% as of December, according to a Redfin representative, it’s still far more than the 4.8% inventory share such pricey homes represented prior to the pandemic.
If you’re a homebuyer in the market for a property in that costly ballpark, it’s important to have a clear understanding of what your annual salary needs to be to comfortably afford the mortgage payment.
While many factors ultimately impact the answer to that question—including the amount of your down payment, as well as your debt levels and mortgage interest rate—here’s a general guide to how much you need to earn to purchase a $1 million home.
The current state of the housing market for homebuyers
The housing market has been on a wild ride for a few years now, one driven by a variety of factors, including the pandemic, housing inventory shortages, inflation, and continual interest rate increases as the Feds tried to tamp down inflation.
Amid it all, home price growth slowly began cooling, as did sales, according to CoreLogic. And that trend may continue throughout the current 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 great news for sellers, it may be helpful for some buyers who had previously been priced out of the market. “With rates down from their highs in 2022 and remaining stable, buyers are gaining more confidence in the housing market and coming back to the table,” says Mason Whitehead of Churchill Mortgage, a national lender.
Interest rate projections for the coming year
Interest rates are the other key factor in home affordability, driving up the cost of monthly mortgage payments when they increase and making homes more budget-friendly when they decrease. During the height of last year’s volatility, interest rates soared above 7%.
But along with home prices declining in the year ahead, rates are also expected to trend downward. By some accounts, rates on a 30-year mortgage may decline quite significantly from the current average of 6.46%, which could be a boon for homebuyers.
“I believe that if inflation continues to decrease, which I expect that it will, we will see interest rates drop in the near future,” says Seth Bellas, a manager also with Churchill Mortgage. “It would not be surprising to see the 30-year fixed rate average float down close to 5% in the next six months and likely hold there in 2023.”
How much do you need to earn to afford a $1 million home?
With these market factors in mind, the question remains—how much do you need to earn in order to afford the mortgage payment on a $1 million home?
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 that’s based on the homebuyer coming to the table with a 20% downpayment and taking out 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 homeowners’ insurance expense of $200 per month.
In order to qualify for a mortgage in this scenario, you would need to make between $195,000 and $210,000 annually or $16,300 per month in gross W-2 income, says Kammer.
His salary estimate is predicated 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 allocated for servicing debt). Mortgage underwriters Fannie Mae and Freddie Mac allow for a DTI of up to 45% (or, in some cases, as much as 50%) of your gross, pre-tax income. That 45% would include your monthly mortgage payment and all other monthly debt—such as auto loans, credit cards, and student loans.
And finally, in order to calculate the salary requirements he identified above, Kammer assumed an average household debt of $1200 per month.
Using all of the same information in the example above, but shifting 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 would need to be $225,000 to $240,000.
“The real question is how much house payment you want to take on,” says Kammer. “The goal would be to only use 28% of your gross or pre-tax annual income toward your house payment. In this market, that may not be 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 exactly 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 having to dedicate to a mortgage. “At the end of the day, you are making the house payment,” he says. It’s also important to consider whether you’ll be paying this mortgage in retirement, and how that payment will affect your cost of living and other financial goals.
The takeaway
While interest rates and home prices may be trending downward in 2023, a $1 million home purchase is still a very expensive proposition. The income required to make the payments each month will vary based on your down payment, interest rate, and other factors, but you’re still likely to need an annual salary that’s close to $200,000. Before taking the plunge on such a large purchase, speak to a mortgage professional who can help you run the numbers and do a gut check.
