Whether you’re moving to Austin or you already live here, when shopping home listings in Austin, Texas, you may spot some million-dollar properties and easily picture yourself walking through their doors each day. But do you have the income to afford one? Ah, the million-dollar question.
The answer to what you can afford, it turns out, works for any level of buyer. Some handy formulas and calculators help show what home price your income can cover, but getting the clearest answer means diving deeper into the numbers, and knowing the economic factors involved will benefit you immensely.
If you have the income to afford a $1 million home, this is particularly good news in Austin because you can benefit substantially. Read on to find out why.
When reviewing financial formulas, income is just one factor. Other elements such as your mortgage down payment, credit, and overall debit greatly influence what you can afford. But looking at two financial scenarios works as a good jumping-off point:
If you have an ideal financial profile that includes savings (up to 50% down), you can afford a 1 million dollar home with an annual salary of $110,000 (just about 10% of the purchase price.)
If you are facing financial challenges, you would need a $250,000 annual salary (about 25% of the purchase price.)
We would all love to be in Category A, and there are ways you can, but to do it means analyzing other financial factors.
Outside Factors that Influence Your Salary Requirement
Unless you have funds to buy a home outright, you will likely need a mortgage. The terms greatly influence the money you pay each year, which affects your salary requirements. Some key determining factors for your rate are:
- Debt-to-Income Ratio (DTI)
- Credit Score
- Down Payment Amount
- Mortgage Rate
The lower your DTI and the higher your credit score and down payment, the lower your rate percentage will be. Industry mortgage rates also fluctuate, so if you happen to finance during a time of low rates (and now is one of those times), you will benefit significantly.
Let’s look at each of these factors in more detail.
Your Debit-to-Income Ratio
Your DTI is the percentage of your income dedicated to paying off your debts. If you are a person who likes bright shiny new things, you know that a high DTI is pretty easy to obtain. The higher your DTI is, the more your lender will see you as a risk and charge you more for your loan.
A high DTI will put you into the Option B category of a $225,000 salary. Lowering your DTI is possible if your debts are primarily a personal preference. You can make changes to your way DTI right away and continuously chip away at it month by month and year by year. But sometimes, such as with home repairs or a divorce, your DTI may not be an easy thing to lower.
For some basic math, here’s what you can expect:
If you have $250 or less in monthly debts and a 20% down payment with a mortgage rate of, say 2.75%, you can afford a $1 million home for $147,000.
Let’s say we increase your monthly debts to $2,500. This number may sound high, but if you are divorced or separated and providing child support, your debts can easily reach that amount and affect your DTI even when your personal debts are low. A high DTI would require a higher down payment and monthly mortgage payment requiring an annual income of around $225,000.
Your Credit Score
As a general rule, the higher your score, the better – especially when buying high-priced homes. Depending on other financial factors outlined above, you may fall outside of conventional loans backed by Freddy Mac and Fannie Mae, but all is not lost. If your credit score is good, you may have the option of a jumbo loan.
In basic terms, high loans mean a greater risk that then equates to higher fees. Jumbo loans work the same way. The difference is they avoid backing by Freddy Mac and Fannie May, and this equates to financial savings that then gets passed to you. If your credit is good, it could even fall below today’s average mortgage rates, but this isn’t always the case.
In exchange for a jumbo loan’s better rate, you will need to meet other financial requirements. Each lender has its own requirements, so it’s good to shop around, but some common ones are:
- A credit score of 700 plus
- A clean credit report
- A down payment of 10% or more (though some may only require 5%)
- A DTI below 45%
- A reserve of cash to cover 6-12 months of mortgage payments
- Proof of income and employment
If you don’t meet the requirements, you’ll face a higher rate, but you can still benefit financially from a traditional loan.
What a High Down Payment Can Do for You
If you want to stay in the Option A category of around $110,000, you’ll need a much higher down payment – as much as 50%. But if you went for a 30% down payment, you could still afford it at a salary of around $140,000, and 20% would be $150,000 a year. These are all considering you have a low DTI ratio of around $250 or less per month.
Benefits of Mortgage Calculator
All of these above factors are helpful for a general snapshot of costs, but it’s important to drill down deeper by following your exact salary and expenses. A clean way to do this is with a Mortgage Calculator.
The calculator takes into account a wide range of financial factors, such as your annual gross income, down payment, debts, mortgage interest rates and closing costs, homeowners insurance, home costs, homeowner association costs, and local property taxes.
Here’s a link to a mortgage calculator to help you get an idea of what you can expect to pay.
Some Things to Keep in Mind
Some factors to notice and account for are home maintenance, utilities, and repair costs for homes at this value. And those property taxes can add up. The larger and more expensive the home is, the more expensive it is to maintain. Don’t forget you will also need to add to your overall savings on top of it all. You don’t want to be living hand to mouth when you move in.
Benefits of a Million Dollar Home
Buying real estate at this price has its benefits. You will enjoy better quality home and a better area of the city. One benefit, however, is particularly appealing in Austin: the resale value.
When it comes to resale, the higher the home price, the better, but this is particularly true with Austin homes for sale. Property values are expected to rise even higher than standard, which is saying something. With a continuously growing population and more tech industry companies moving here, it is a smart choice to purchase a high-value home to fit the demand of an influx of high-income residents.
We’re Here to Help
When you are ready to start your Austin home search, Smart Austin Realty is ready to help. Our Austin Realtors know the area well and can help you find the home of your dreams. They can also connect you with reliable mortgage lenders to help you make your dream a reality. And with your budget set, our experienced agents and real estate website will help you find the right neighborhoods and best houses to buy for your budget and lifestyle. Contact us to learn more.