A three million dollar house is a very nice house in most parts of America. Once you cross the $3 million threshold, you are entering into luxury territory. After all, the median home price in America is about $440,000. Therefore, if you buy a three million dollar house, you are paying 7X the median.
However, three million dollars still doesnt buy you a mansion in cities such as San Francisco, San Jose, Los Angeles, Seattle, and New York. You can get a nice house for $3 million in the expensive coastal cities. However, where you buy your three million dollar house matters.
Given you are looking for a three million dollar house, Im assuming you are looking in a big metropolitan area where high incomes are common. Therefore, let me share with you the income recommendations necessary to buy your new home.
How Can I Afford a $3 Million Dollar House?
Buying a $3 million house is a dream for many, but becoming a reality for few. As home prices continue rising across the country, these luxury homes are increasingly out of reach for most buyers. So how can an average person realistically afford to buy and maintain a $3 million property? Here are some tips.
Assess Your Financial Situation
Before setting your sights on a multi-million dollar home, take an honest look at your finances. What is your annual household income? How much do you have saved for a downpayment? What other assets could you leverage? How strong is your credit score?
You’ll likely need a minimum household income of $500,000 to $1 million to comfortably afford a home in this price range. Save at least 20% for a downpayment too, which would be $600,000. The more you can put down, the better.
Aim to keep your total monthly housing costs below 30% of your gross monthly income. This includes your mortgage, property taxes, insurance, HOA fees and maintenance costs. Don’t overextend yourself just to get a luxury address.
Improve Your Credit Score
With a 20% downpayment on a $3 million home, you’ll still need to finance $2.4 million. To get the best mortgage rates, which can save you tens of thousands in interest, your credit score needs to be squeaky clean.
Pay off all outstanding debts and maintain a low credit utilization ratio below 30%. Check your credit report for errors and have them corrected. Avoid applying for new credit before applying for a mortgage. These steps can help boost your score over 700.
Choose the Right Location
Where you buy dramatically impacts what $3 million can buy. In New York, San Francisco or Honolulu, it may only buy a 2,000 square foot condo. In Dallas or Atlanta, it could buy a 10,000 square foot mansion on acres of land.
Research prices in your target areas to understand what to expect. Prioritize locations near good schools, amenities and employment hubs to help retain the home’s value. Just don’t buy the most expensive home in the neighborhood.
Select a Property Wisely
Resist overimproving for the neighborhood or buying more home than you need. Opt for move-in ready rather than a fixer upper to limit unexpected costs. Carefully vet inspection reports to avoid expensive issues.
New construction may offer customization options and lower maintenance but often comes at a 10-20% premium. Pay attention to noise sources nearby too. Little nuisances can become huge headaches when you’re spending this much.
Get Preapproved for a Loan
Work with a reputable lender to get preapproved before house hunting. This shows sellers you’re a serious buyer who has the financing ready. Preapproval letters specify the loan amount and terms you qualify for based on your finances and credit.
Having this letter in hand gives you leverage to act quickly when you find the right home. You’ll know your price limits and be able to make competitive offers more easily.
Make a Large Downpayment
Putting down 20% or more of the purchase price lowers your monthly payments, interest costs and reduces the amount you have to finance. For a $3 million home, that means having $600,000 or more ready for the downpayment.
Besides saving diligently, you may need to leverage other assets to boost your downpayment. This could include cashing out investments, borrowing against your 401(k), taking loans from family or selling other properties you own.
Know the True Costs
Aside from the mortgage, property taxes and insurance will be sky-high on a multi-million dollar home, ranging from $60,000 to $100,000+ per year depending on location. Factor in maintenance, utilities, HOA fees and other costs too.
Don’t underestimate expenses for staffing, concierge services, cleaning, landscaping and pools that often come with large homes. Create a realistic budget to ensure total costs don’t exceed 30% of your income.
Consider Getting a Jumbo Loan
Most conventional mortgages are capped at $647,200 for single family homes. For anything above that, you’ll need a jumbo loan. Jumbos come with higher rates but allow you to finance up to $3 million.
Jumbos require larger downpayments, often 25% minimum. You also need pristine credit and sufficient assets and income to qualify. The lending process is rigorous to ensure you can truly afford such a large loan.
Make a Joint Purchase
If purchasing solo is out of reach, teaming up with another buyer can make a $3 million home attainable. This could be a spouse, partner or even a friend or relative. Co-purchasing lets you pool resources for the downpayment and share mortgage payments.
Draw up a co-ownership agreement detailing each person’s rights, responsibilities and share of ownership. Discuss exit strategies too in case someone wants out in the future. An attorney can ensure you structure things properly.
Invest in Home Upgrades
Even luxury homes often benefit from upgrades and personalization after purchase. Smart renovations tailored to your tastes can maximize enjoyment of the home. They also boost resale value if done properly and cost-effectively.
Focus upgrades on the kitchen, bathrooms and outdoor living spaces first. Install premium finishes like stone counters, custom cabinets and high-end appliances that appeal to future buyers too.
Lower the Interest Rate
With interest rates on the rise, financing $2.4 million over 30 years at 5% would mean over $200,000 a year in mortgage payments. That’s a huge chunk of your take home pay.
To ease this burden, take steps to lower your interest rate. Make points to buy down the rate, shop multiple lenders and adjust loan terms. Just a quarter percent decrease could save tens of thousands over the loan’s duration.
Consider Renting Out Space
One way to offset the high costs is generating rental income. Rent out a guest house, finished basement or separate wing that won’t interfere with your own living space. You can also lease out the entire home and become a landlord if circumstances change.
Just be sure to follow all local zoning laws and get proper insurance coverage for rentals. Hiring a property manager also makes this more passive if you don’t want full-time landlord duties.
Wait for a Cooling Market
In recent years, home prices have risen at unprecedented rates due to ultra-low interest rates, supply shortages and high demand. This has made affording a luxury home even harder.
If you can, consider waiting for signs of a buyer’s market before purchasing. As interest rates rise and more homes hit the market, prices may moderate and give buyers more leverage again. You’ll have less competition too.
The bottom line is affording a multi-million home takes substantial wealth, income, preparation, sacrifice and discipline. While not easily achievable for most, with the right planning and smart financial decisions, owning a $3 million dollar house may not just be a dream.
Cities That Could Face A Housing Downturn
Given buying a three million dollar house will likely be the most expensive purchase of your life, you should be aware of cities that may be at risk of a housing downturn. If you buy a three million dollar house with 20% down and the housing market declines by 20%, you just lost 100% of your equity. Thats $600,000 gone!
Therefore, be aware of cities where real estate prices are way up compared to its prior peak and with upcoming supply. These cities are in the upper right quadrant of the graphic below. I would definitely be careful about stretching in cities like Austin, Dallas, and Nashville. In such heartland cities, try and keep your house price purchase to no more than 3X your household income. There is an endless amount of demand to build in these cities.
Family Budget Owning A Three Million Dollar House
Below is a real budget for a family of four living in an expensive city earning $500,000 a year. Each parent is responsibly saving in their 401k to the tune of $18,000 a year. The parents also purchased their home for only $1.5 million back in 2012. Yet, they still dont have much cash left over each year.
Today, their $1.5 million home is worth closer to $3.2 million. If they had to buy their home today, after putting 20% down, their annual mortgage would go from $60,000 to $129,596. In other words, they would need to earn about $100,000 more in gross income more to comfortably afford their home. This puts their total gross income figure at $600,000, or bang in line with my minimum income recommendation.
In other words, the family earning $500,000 is extremely blessed that they bought their $3.2 million home near the bottom of the housing market in 2012. They could not afford their current home on their salary today.
The last thing you want to do is buy a three million dollar house and get laid off. Many who bought multi-million dollar homes not only lost their jobs, but also their homes during the 2008-2009 Global Financial Crisis. Weve had an incredible bull market since 2009, which means its worth being more cautions now.
When buying a home with debt, you are essentially making one of the biggest career and investment gambles of your life.
How to Afford a 1 MILLION Dollar House (Including Down Payment!)
FAQ
What is the minimum salary to afford a million dollar home?
The answer: $250,000 or more per year
To afford a $1 million home, you’ll typically need an annual salary of at least $250,000 per year. This calculation assumes a 20% down payment and a 30-year fixed mortgage.
What income do you need to afford a $300,000 house?
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Message & data rates may apply. Reply STOP to opt out. This field is for validation purposes and should be left unchanged. While there’s no one-size-fits-all answer, a good starting point for affording a $300,000 home is an annual income of around $75,000 to $95,000.
Who can afford a 5 million dollar home?
The absolute minimum income necessary to afford a five million dollar house is $1 million. The recommended income for owning a five million dollar house is $1.67 million. An acceptable income to own a five million dollar house is $1,250,000.