How to buy a million dollar home

We all have dreams to live in a big, beautiful house. However, these days, if you live in a city like San Francisco or New York, it’s more likely you’re dreaming about the possibility of owning a home at all. The median home price in the New York City metro in November 2023 was $849,000, while San Francisco’s was an astonishing $1.3 million. In fact, a Redfin report found that 8% of American homes were valued at more than $1 million in 2023.

It might sound crazy, but $1 million just isn’t that much money anymore when it comes to the housing market. If you want to own property in some of the country’s most desirable markets—we're talking modest houses not even mansions—it’s likely you’ll need to buy a million dollar home. Whether you’re moving to an expensive area or you just like to dream big, you need to know how to buy a million dollar home. 

How much you need to make to afford a million dollar home

The monthly mortgage payment on a million dollar home will vary depending on your down payment, interest rate, and property taxes. Let’s say you paid 20% down ($200,000) and got a 6.5% interest rate on the remaining $800,000 mortgage principal. Your monthly payment, assuming national average property taxes, would be $6,320. 

→ Use a mortgage calculator to estimate monthly payments

When doing the affordability math, it’s good to keep the 28/36 rule in place. This guideline states that you should spend no more than 28% of your total income on your monthly housing costs, and no more than 36% on all monthly debt payments.

So, let’s say you have a $6,320 monthly mortgage payment — how much do you need to afford that? Well, $6,320 divided by 28% is $22,571.43. That means you’ll need to bring in $22,571.43 per month to be able to afford a million dollar house with present interest rates. That’s the equivalent of $270,857.16 per year.

Monthly mortgage payment / 0.28 = how much you need to make per month 

Remember, the 28% only applies if it doesn’t dramatically increase the 36% part, too. If you have an abundance of student loan debts, credit card debt, a car payment, or other forms of debt that take your monthly debts to more than 36% of $22,571 (or $8,125 in this example), then you probably can’t afford a million dollar home. You don’t want your house payment to be such a burden that you end up missing payments elsewhere, thereby impacting your credit. It could hinder your ability to buy another home in the future or, worse, eventually lead you to miss mortgage payments on your current house.

Likewise, remember to factor in costs of homeownership like utilities, maintenance, and upkeep which can be exorbitant. A new roof could easily cost $20,000, and you don’t want an essential cost like that to make your home unaffordable.

How can you buy a million dollar home?

Process-wise, buying a million dollar home isn’t any different from buying a $300,000 home. The biggest difference is the calculus that goes into figuring out if you can afford such an expensive home.

If you found your dream home but it’s a bit of a stretch financially, don’t worry. There are ways to afford a million dollar home even if it’s a little over-budget. Whether you have the income but lack the down payment or vice versa, buying a million dollar home isn’t impossible. Here are a few options to consider:

Make a big down payment

As we’ve mentioned, the best way to make a million dollar home more affordable is to pay as much as you possibly can upfront. The bigger the down payment, the smaller your loan principal.  Ideally, you can pay more than $250,000 in cash to get below jumbo loan mortgage requirements.

Here are examples of how your down payment can significantly affect your million dollar mortgage, based on a 30-year mortgage with a fixed interest rate of 6%.

Get help from family

If you’re making a good income but don’t have the cash to make a 20% down payment on a million dollar home, there’s no shame in asking for help from family. Whether it’s a mortgage gift or a gift of equity is up to you and your family members, but a cash influx to reach a higher down payment is a great way to ensure you can afford your mortgage. Just remember you’ll need to get a mortgage gift letter. 

Financial windfall

Obviously everybody would love to have a huge amount of cash suddenly appear in their lives. That’s not likely to happen, but you can plan for windfall events like promotions, corporate acquisitions, IPOs, or inheritances. If you know you may be in line for a financial windfall, plan to use that money on a down payment on a home.

Jumbo loan

A jumbo loan is one that exceeds loan-servicing limits set by Fannie Mae and Freddie Mac. Today, that number is $766,550 for a single-family home. These loans tend to have higher interest rates, stricter underwriting rules, and require at least a 5% down payment as opposed to 3% for some conventional mortgages. Note that even with a 20% down payment on a million dollar home you will need to qualify for a jumbo loan.

What factors impact a million dollar mortgage?

Since getting a loan for a million-dollar home usually means taking out a jumbo mortgage. While it may be larger in size, the same crucial factors still influence your mortgage payment and affordability. Remember, if you’re borrowing more than $766,550 you will need to meet qualifications for a jumbo loan and be able to pay the higher loan amount.

• Down payment: In the example above, we used a 20% down payment, which is the amount required to eliminate private mortgage insurance (PMI), an extra cost assessed in your monthly payment to protect the lender against default. Anything less than 20%, expect to pay more each month. Anything more, expect to pay less.
• Debt-to-income ratio: Your lender will analyze your monthly incomes and debts to determine a deb-to-income ratio (DTI). This is the 36% part of the 28/36 rule. Your DTI can change over time as you accrue additional debts or have a change in income so it’s important to regularly assess this number.
• Credit score: If you have a strong credit score, you may be able to lock in a better interest rate. A poor credit score and you’ll likely have a poor interest rate.
• Financing options: There are a number of programs out there for first-time homebuyers to assist with down payments or closing costs. If you’re buying a million-dollar home, you probably won’t qualify, but lenders want your business and if you shop around you may be able to find one to give you some perks to lock you into a mortgage.

3 tips for buying a million dollar home

If you really want to buy a million dollar home but aren’t sure if you can afford it, there are a few things you can do.

Look at different areas

A million dollars looks a lot different depending where you are. For instance, recall that the average home in San Francisco costs $1.3 million. That means a million dollar home is likely on the smaller side of homes in the market and probably won’t be ideal for a family. Compared to, say, Nashville, TN where the average home value is $584,900, a million dollar home will likely be a larger one in a nice neighborhood. A million dollar home makes you a bigger fish in Nashville.

Remember, though, there are reasons why Nashville is far less expensive than San Francisco. Make sure you actually like a place before you move there.

Improve your loan application

As we’ve noted throughout this piece, a larger down payment will allow you to spend less on a monthly mortgage payment. There are a few things you can do to make yourself a more attractive mortgage applicant, however. Since you will likely be limited to conventional loan options for such a valuable property, you want to give yourself the best chance possible for approval. Some suggestions:

• Raise your credit score: Any credit card debt? Pay it off. Open credit cards you don’t use, close them out. Raising your credit score even a few points can have a big impact on your interest rate.
• Pay off debts: If you’re close to paying off a car loan or student debt, paying it off before applying for a mortgage is a good idea.‍
• Consider an ARM: An adjustable-rate mortgage (ARM) is a loan where the rate can fluctuate. This is a good option when interest rates are high as you can lock in a lower mortgage rate for a few years and either refinance to a lower rate down the line or sell the house before the time period is up. Most ARMs are three years or five years in term. But be careful, lenders offer these because there’s always a chance that rates actually increase in five years.

Wait or buy something less expensive

Property is likely one of the best investments you’ll make in your life. You don’t have to jump right into a million-dollar one, though. One of the best ways to finance a million-dollar home is to have the proceeds from a smaller home sale to help you with the down payment.

Lenders want to give you a mortgage. They’re not going to consider all of the costs and potential impacts on your finances. Only you can do that, and only you can say how comfortable you are with a certain monthly payment. You want to give yourself the best deal possible, and a good way to do that is to be patient while you earn more money, reap dividends from another property investment, and wait for interest rates to decrease.