You should make about $200,000 annually to safely afford the mortgage and other necessary costs of owning an $800,000 home. Read on to learn more about the costs of owning an $800k home and how to afford one.
hash-markHow to Afford a $800,000 Home
- Consider How You'll Purchase the Home
- Qualify for a Mortgage
- Save for Closing Costs
1. Consider How You'll Purchase the Home
The first step to affording an $800,000 home is to secure financing. If you plan on paying cash, this step is simple – just save $800,000 and buy the home outright. However, the vast majority of people will need to obtain financing first.
2. Qualify for a Mortgage
The next step to purchasing an $800k home is getting a mortgage. Most borrowers purchasing an $800,000 home will likely go for a conventional mortgage from a traditional lender such as a bank or credit union. With a loan that large, lenders will want to see a solid financial profile, which means a credit score of at least 620 and enough income to safely cover the mortgage payments.
You may also consider an FHA loan which only requires a 580-credit score and a minimum down payment of 3.5%. However, the limit for FHA loans on a single-family home is also $726,200 in most areas, which may make it difficult to obtain a loan if you plan on making a lower down payment. But the limit is $1,089,300 in Alaska, Hawaii, and other high-cost areas. So, an FHA loan may be a great option if you live in one of those areas.
VA and USDA loans are also an option for veterans and rural homeowners and offer 0% down payment options and lower credit requirements for those who qualify.
3. Save For Closing Costs
You must save at least 20% for a down payment or $160,000 to avoid private mortgage insurance. Keep in mind that a loan amount above $726,000 is considered a jumbo loan. So, if you plan on putting down less than a 10% down payment, you may be subject to stricter requirements.
hash-markCost to Own a $800,000 Home
The biggest cost of owning a home will be your mortgage payment. Your mortgage payment will depend on your risk profile, according to a lender, who will assign you an interest rate based on your risk profile. However, the average mortgage payment in the US is around 7.3% for a 30-year fixed-rate loan. So, if you could make a 20% down payment on an $800,000 loan, the total loan amount would be $640,000. At 7.3% interest, your monthly payment would be $4,388.
hash-markMortgage Payments for $800k Home
According to many financial experts, your mortgage payment should not exceed 28% of your income. So, if you make $200,00 per year, then your monthly income would be $16,666.67, and 28% of that would be $4666.66, leaving you a comfortable cushion to afford other expenses. You might receive a lower interest rate if you have a higher credit score or can make a larger down payment. But if you make $200,000, you could safely afford an $800,000 home.
You might also consider a 15-year fixed rate mortgage, which would require a $5,860 down payment at 7.3%, in which case you would need to make at least $250,000, but you would pay off the loan in half the time.
hash-markProperty Taxes for $800k Home
Taxes are another cost to consider, which will vary depending on where you live. But the average effective property tax rate in the US is around 1.11% or about $8,800 per year for an $800,000 home.
hash-markMaintenance and Upkeep for $800k Home
You should also consider routine maintenance and upkeep, which will also depend greatly on the size of the property and where it's located. However, a good rule of thumb is to save about 1-2% of the home's value every year to pay for maintenance – or about $8,000 to $16,000 for an $800,000 home.
hash-markRecommended Net Worth to Afford an $800,000 Home
A comfortable net worth to afford an $800,000 home is about $400,000. Most financial experts recommend investing no more than 30-40% of your net worth into your home's equity. So, if you plan on making a 20% down payment of $160,000, you should have a net worth of about $400,000 or more.
Lenders will want to see that you have other assets beyond what you're investing in the home to ensure you have a comfortable financial cushion in case you suddenly cannot work if there is a downturn in the economy. Those assets could include savings, retirement accounts, rental properties, etc. Although you could have a lower net worth with a higher income, $400,000 is a comfortable amount to afford an $800,000 home.
hash-markShould You Buy an $800,000 Home and Up?
If you have a household income of $200,000 and a net worth of $400,000 and up, purchasing an $800,000 home is a smart investment that will likely pay off in the long term. However, if you are not quite there with your finances, investing in a less expensive property and working your way up or renting until you're ready to afford your dream home may be smarter. While owning property is usually a smart investment, you don't want to put yourself in a situation where you struggle to make your monthly mortgage payment.
hash-markBuying an $800,000 Home Bottom Line
Buying an $800,000 home can be a great feeling, and in almost any area, it will afford you a comfortable property. However, purchasing a home is a major responsibility, so before committing, you should take stock of your finances and ensure you can realistically afford the associated costs.
