If you’re in the market for a new home, it’s important to put consideration into your budget. After all, home prices can vary wildly depending on a range of factors. And, if you buy a home that costs more than you can afford, you could be setting the stage for a long-lasting financial hardship — one that could end in foreclosure. 

But what if you find the home of your dreams with a price tag of $1 million? How much money would you have to make to be able to comfortably afford it? That depends. There are rules of thumb you can follow to determine the answer, but your unique financial situation may also have an impact. 

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How much do you have to make to afford a $1 million home?

If you search the internet for rules of thumb surrounding how much house you can afford, you’ll likely come across several, but the 28% rule and the 2.5 times your income rule are most prevalent. Here’s how they work: 

• The 28% rule: The 28% rule suggests that your mortgage payments shouldn’t be more than 28% of your annual income. 
• The 2.5 times your income rule: This rule states that you should be able to comfortably afford a home that costs 2.5 times your annual income.   

“Figure a 20% down model, the mortgage would be for $800,000,” says Mark Charnet, founder and CEO of American Prosperity Group in Sparta, NJ. “A 30-year loan at 8% would be a monthly payment of $5,870. To that, add the property taxes of, let’s assume $20,000 annually and insurance of $9,000 annually. This would add $1,666 and $750 for a monthly payment of $2,416 for a grand total of $8,286 per month: Principal, plus interest, plus taxes, plus insurance.”

Here’s how much you’ll need to make to afford a $1 million home based on each of these rules (assuming a 7% mortgage rate, a 30-year loan term, $20,000 in annual property taxes and $9,000 in annual insurance premiums — variables that generally differ from one mortgage to the next).

How much do you have to make based on the 28% rule?

If you put 20% down on your $1 million home, you would need an $800,000 mortgage for the remainder of what you owe on the purchase. In this case, your mortgage payment would be $7,739 per month, inclusive of estimated property taxes and homeowners insurance costs. That amounts to about $92,868 per year in mortgage payments. 

With 0% down, you can expect to pay $9,070 per month inclusive of estimated property taxes and homeowners insurance costs. With less than 20% down, you should also expect to pay for private mortgage insurance (PMI), which would cost about $1,250 per month. That works out to a total of $10,320 per month, or $123,840 in annual mortgage payments. 

Based on these figures, you would need to earn $331,671.43 annually to afford a $1 million home with a 20% down payment if you follow the 28% rule. Or, you would need to earn about $442,285.71 annually to afford the same home with no down payment based on this rule. 

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How much do you have to make based on the 2.5 times your income rule?

To determine how much money you need to earn annually to afford a one million dollar home based on the 2.5 times your income rule, you simply need to divide $1 million by 2.5. So, this rule suggests you need to earn $400,000 annually to afford a $1 million home. 

Other considerations to note

Ultimately, rules of thumb are meant to be broken — and whether or not you can afford a $1 million home depends on your unique circumstances. 

First, down payments, interest rates, property taxes and insurance are all variables that may change from one mortgage to another. Moreover, Charnet notes out that $20,715 in monthly income would be enough to afford this home if there were “no other debts to consider.”

As you determine whether or not you can afford a mortgage, it’s important to consider your unique mix of rates, premiums and taxes as well as how a new monthly payment fits into your current financial plan. 

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The bottom line

There’s no single rule of thumb to determine whether or not you can afford a million-dollar home. The 28% rule and the 2.5 times your income rule are great places to start, but it’s also important to think about your debts and other unique financial needs when determining how much house you can afford to buy. 

Joshua Rodriguez

Joshua Rodriguez is a personal finance and investing writer with a passion for his craft. When he’s not working, he enjoys time with his wife, two kids, three dogs and 10 ducks.