What income do I need to afford a $900K house?

If you find yourself in the fortunate position of having $900,000 to spend on a home, you have a plethora of options at your fingertips. This substantial budget is more than double the national median home price, offering a wide range of possibilities for your dream home. However, there are several crucial factors to consider when determining whether you can comfortably afford a house of this caliber.

The Financial Breakdown

Using Bankrate’s mortgage calculator as a guide, let’s assume a 20 percent down payment and a 30-year fixed mortgage with a 6.8 percent interest rate. This results in a monthly principal and interest payment of approximately $4,693. Additional expenses like property taxes and homeowner’s insurance will increase the monthly mortgage payment to around $5,400, totaling about $64,800 annually.

Financial experts often recommend that housing costs should not exceed one-third of your income. Based on this advice, the minimum annual income required to comfortably afford a $900,000 home would be approximately $194,400. It’s worth noting that this estimate does not factor in upfront costs such as closing fees and the down payment, which amounts to a substantial $180,000 for a 20 percent down payment.

The 28/36 Rule

When preparing for a home purchase, it’s crucial to understand the 28/36 rule, a widely recommended spending guideline. According to this rule, you should allocate no more than 28 percent of your income to housing, and no more than 36 percent to your overall debt payments.

Applying this rule to the calculated income of $194,400, it translates to a monthly housing budget of $4,375. This figure encompasses principal, interest, property taxes, insurance premiums, and any applicable HOA dues. Additionally, for the 36 percent portion, factor in all other monthly expenses like credit card bills, car payments, and student loans. If this total surpasses 36 percent of your monthly income, it may be a sign that you’re stretching your budget too thin.

Additional Factors to Consider

Several other variables play a crucial role in determining how much home you can afford:

• Down Payment: The size of your down payment significantly impacts your affordability. A larger down payment means borrowing less, resulting in lower interest payments and monthly installments. However, if you put down less than 20 percent, you may need to pay for private mortgage insurance.
• Credit Score: Your credit score plays a pivotal role in your mortgage affordability. A higher score translates to more favorable interest rates, ultimately reducing your monthly payments.
• Loan-to-Value Ratio (LTV): This ratio compares the mortgage amount to the home’s value and is a critical consideration for lenders.
• Debt-to-Income Ratio (DTI): This ratio evaluates your monthly debt obligations relative to your income, which is crucial in mortgage applications.
• Financial Assistance: Various national and local government programs offer down payment or closing cost assistance, especially for first-time buyers. However, high earners may not be eligible for these programs.

Stay Committed to the Plan

As you approach closing day, maintaining financial discipline is crucial. Avoid major purchases or significant income changes that could impact your credit score or debt-to-income ratio, potentially leading to a reassessment of your application by the lender.

Additionally, stay closely connected with your real estate agent. They possess invaluable knowledge of the local market and can guide you through the entire closing process.

With careful consideration of these factors and prudent financial planning, you can confidently navigate the path to affording your $900,000 dream home. Whether in bustling urban centers or serene suburbs, this budget opens doors to a wide array of housing options across the country.