Having a million dollars cash can buy you a lot of things, and a generation ago, that would include a luxury mansion. The housing market has exploded in many major cities, and now that million translates into a nice family home.
Most people want to own their piece of real estate, and if you are looking for a 7 figure property, you need to have certain criteria met to qualify.
Is it possible to have a house that is worth that much? Here is what it takes to afford a million-dollar home.
1. Pay Cash
This is the easiest way, that is if you have the money. Paying cash for a million-dollar home allows you to enjoy your place without the burden of a mortgage. Unfortunately, that kind of cash is hard but not impossible to earn.
You can buy and sell properties and trade up until you get there with cash. Maybe you are an entrepreneur or investor that can turn a hefty profit in a short period. Whatever the method of accumulating money, if you can do it, congratulations. For the rest of us, you will need to contact a luxury real estate agent for help.
2. Down Payment
You will need a large down payment to buy a home of this value. 20% is the minimum down payment for a $1 million home and above, which translates to $200,000. If you have less than 20% in Canada, you must pay for mortgage default insurance through Canadian Mortgage and Housing Corporation (CMHC). CMHC will not give this insurance for a home valued at $1 million, so a 20% minimum is your starting point.
3. Closing Costs
Closing costs are the extra expenditures that come with buying a property. These include:
- Legal fees
- Title insurance
- Land transfer tax
- Home inspection
The closing costs range from 1.5% to 4% of the property’s purchase price, so for 1 million dollars, it can be as much as $40,000. Combined with your down payment, you need around a quarter million to buy the home.
4. Debt Service
The next thing you need to afford a million-dollar home is the ability to make payments on it. This is done by two different formulas: your debt service ratios. Here are how they work.
Gross Debt Service Ratio To determine if you can afford to pay the monthly carrying costs of the home, the annual mortgage payments are added to the other costs of owning a home and divided but your annual household income. Other costs include strata fees, heating and property tax. The ending ratio needs to be less than 32% to qualify. For a $1 million home with 20% down, your mortgage is $800,000 and depending on the mortgage rate, you have, your household income needs to be over $150,000 to $200,000.
Total Debt Service Ratio Next, we must determine what other debt you may carry. This can include:
- Vehicle payments
- Credit card debt
- Housing expenses
- Support payments
Your gross debt service ratio is added to the rest of your debt and divided by your annual income, and this formula must be 40% or less to qualify.
These numbers go up as the purchase price of the home does, but the formula is the same.
6. Your Income
As stated earlier, you need an annual household income of between $150,000 and $200,000 to qualify for an $800,000 mortgage with 20% down. This income can be shared between two people, so they need a steady, high-paying job to reach the threshold.
Many lenders also want a solid work history of at least two years to qualify and check your credit score to see if it is good. Your credit score shows your willingness to repay, while your income shows your ability to repay.
This isn’t a deal breaker if you don’t have a solid work history because it is just part of the overall picture that includes your down payment and debt service ratios. Some people switch careers or start a new business, and lenders consider these things when considering a mortgage for a million-dollar home.
7. Personal Savings
This personal criterion is not part of a lender’s purview. A million-dollar home costs a lot every month, and if you get behind, it can be difficult to catch up. An emergency nest egg in savings is key to successfully purchasing an expensive home.
Consider having 3-6 months’ worth of mortgage payments in the bank in case of a layoff, injury or other work disruption. This can be in savings, investments or stocks, and they can be accessed if necessary to ensure you can afford to carry the mortgage if financial circumstances change.
Can you afford to buy a million-dollar home? Work through this list to see what it takes and if you aren’t solid in any areas, shore yourself up with more time and money. Work hard towards your real estate goals, and then be confident in your million-dollar purchase because you and your family are worth it.