Everyone wants to own their dream home one day. It’s a huge part of our lives, it’s where we sleep and eat and spend time with our friends and family – so of course we want to find and buy a house that’s just right for us. Maybe the house you’ve got your heart set on is a $700k house, or maybe you’re looking at your dream location and seeing that as an average housing price. Either way, if you are looking at a $700k house it’s normal to ask if you should buy it or not.
To almost everyone, $700k is a large amount. The average US house price is around $340k – buying a $300k house can be hard enough, and a house valued at $700k is over double this. It’s sensible to stop and think before looking at signing the papers on a purchase that large. There are a lot of things to consider too, such as your income, spending habits, and savings, as well as the practicalities of the house.
Let’s look at some of the things you should consider before taking the plunge and buying that $700k house.
Buy a house outright or get a home loan
Let’s be honest, not many people can afford a 700k house outright. In fact, the median US income is roughly $31k, and most people do not have $700k tucked away in savings. This means that most people will have to look at getting a mortgage to afford a house like this.
Taking out a home loan
Getting a mortgage or a home loan is something a lot of people are fine with, and it’s a generally accepted rule that a mortgage is ‘good debt’. This means that while buying a house on a mortgage puts you in debt, paying off the debt builds you equity – that is, the value of the house that you own, and that you are paying off. It is quite common for housing prices to rise as well, which means that putting yourself in debt to buy a house often means that you have an investment that will grow in value over time – again, this is why a mortgage is considered a good type of debt to have. Of course, housing costs can go down, especially if the market struggles or crashes. However, this is one of the risks you take with any kind of investment.
If you are able to buy a $700k home outright, then your considerations may be different when looking at whether or not to purchase. You should still absolutely check to see how the purchase price of the house would affect your financial security. If this is the majority of your savings, you may want to think carefully. Buying a house outright means that you do not have to pay the interest on a mortgage, which saves you money in the long term, but emptying your savings is still a risk.
Most financial advisors suggest that you have at least three months’ worth of household income or household expenses in your savings account at any time, but more and more people are being recommended to have at least six months’ worth of expenses in their savings. This can be essential if something bad happens like you lose your job, your car breaks down, the house needs repair work, or you have unexpected medical bills. Of course, if you own a house outright you could sell the house in order to pay for expenses, but once you have found your dream home it is preferable to not have to sell it and uproot your entire life.
If you think that your savings would be diminished too much by buying a house outright, you could still get a mortgage to purchase a home. This can be appealing to people who want to still have some savings to fall back on if something happens. Of course, you do not have to borrow as much as someone with fewer savings might – you could find a mortgage provider who will let you put forward a higher deposit – this means that you would be borrowing less money and have less interest to pay in total. You might also be able to get a lower interest rate on the home loan.
Whether you want to get a home loan in order to keep the balance of your savings account up, or whether you need a home loan to afford a 700k house, let’s look at some of the considerations when people are hunting for a mortgage.
How do they assess my mortgage application?
A mortgage application will usually be based on a few factors. Of course, every case is different, so you may not find that your mortgage application comes out in a similar way to other applications, but this can give you a rough idea of what to look out for.
The house itself
One of the biggest factors in a mortgage application is of course the house itself. The purchase cost of the house is the main issue, though some mortgage lenders may also consider the age and the condition of the house – this is usually a consideration for home insurance purposes, as most mortgage lenders require that the house is insured when it is bought using a home loan. This might mean that particularly old, unusual or damaged homes might be difficult to find a mortgage for.
The other huge factor that determines whether or not a mortgage application will be accepted is your income – the mortgage lender will have an idea of the income needed to be able to pay the monthly mortgage payments, and they can refuse people who do not have enough income. How much income you have is often the make-or-break in deciding whether someone can afford a house, even on a mortgage.
What is the debt to income ratio?
The debt to income ratio is the amount of money you have coming in as annual income, vs the amount you have going out as debts. The debt to income ratio considers a lot of different debts – for example, you may find that car payments, health insurance payments, appliance payments, bank debts, credit card debts, and other debts will all be considered when a bank or mortgage provider is considering whether or not to give you a mortgage.
If you are not sure what debts you have, it is important to make a note of all the different debts you have. A lot of this will be covered by your credit score, which means that your credit score is a useful tool for you to check how likely you are to get a mortgage but be aware that this is not the only information that a bank of the mortgage lender will look at. If you are still unsure whether or not you can afford a 700k home, you can use an affordability calculator to help gauge your monthly income vs your monthly debts. You can also get pre-qualified for a mortgage of a certain value, which can help when you are looking for a house. This means that you will know the maximum value of a property that you can realistically look for.
What savings do I need?
When you are looking at applying for a mortgage, you will almost certainly need a down payment or deposit to pay toward buying the house. If you want to get pre-qualified for a mortgage, you will likely have to have this down payment saved up before you make an application to be pre-approved.
While occasionally people can find mortgage deals that do not require a deposit, these are very rare. Most of these mortgage deals will require the borrower to have a guarantor who will pay the mortgage payments if the borrower defaults. Even then, a 0% deposit mortgage is rare – many people turn to a licensed mortgage broker to help them find the less common types of mortgages.
How much will a down payment be?
More commonly, people can qualify for mortgages with a 95% LTV or lower. The LTV is the Loan to Value. This means that on a 95% mortgage, you would pay 5% of the property value upfront, and the other 95% would be borrowed from the mortgage provider. This means that on a 95% LTV mortgage for a $700k property, the deposit at 5% would be $35,000.
Bear in mind that this is a minimum deposit amount. Plenty of mortgage providers offer mortgages to people who have higher deposits to put toward buying the house. Putting forward a higher deposit means that you are borrowing less money and this, in turn, means that you will end up paying less in interest. You may also be able to get a lower interest rate if you are borrowing less money. However, you should still be careful not to completely drain your savings when paying the deposit. There are various eventualities that you could need savings for, such as medical bills or home repair costs.
What other savings should I have?
As mentioned above, it is always sensible to have savings to cover any unexpected expenses that could come up. A lot of people find that savings can help lessen the stress and uncertainty when facing a surprise such as unemployment, home repairs, car repairs, and medical bills.
Beyond this, if you have other personal savings goals, you may not want to put this money into a deposit. If your personal savings goals include buying a car you want or having enough money to start a family, you may find that these are more important than putting everything you have into buying a house. However, it is worth using an affordability calculator to see how your mortgage payments might change if you put in different amounts for a deposit. This can help you decide how much you are willing to spend, even before you apply to see if you pre-qualify for a mortgage.
Can my partner’s savings be included?
If you are buying a house with your partner, you can often add their savings in for the deposit. It is very normal that people who are buying a house together will pool their resources and save up together in order to be able to afford a house. This can help massively with both the deposit and mortgage payment each month, but you should make sure that both of you are comfortable with the agreement, and you should make sure that the paperwork is properly filled in if you want to both be owners of the house – otherwise, you could find that one partner owns the house while the other has put money in but has no claim to ownership and no equity in the property.
What about the monthly mortgage payment?
The other large portion of the mortgage is the monthly mortgage payment that you have to make towards paying the loan amount. If you have picked a larger deposit you may find that your monthly mortgage payment is lower based on how much mortgage you have on the house. Additionally, your monthly mortgage payment could vary depending on what type of interest rate mortgage you have chosen. If you pick a variable interest rate mortgage, you might find that the interest goes up, which means you could pay more than anticipated. You could alternatively find that a variable interest rate mortgage has lower interest than a fixed interest rate mortgage.
What is the annual income needed for a $700k mortgage?
There is a usual rule that mortgage lenders will let someone borrow four or five times their annual income. This means that the annual income needed for a mortgage on a $700k house would be around $200k per year.
If you earn significantly under this amount, it is unlikely that you could get a mortgage to afford a house that costs $700k. If you make a bit below this amount, you may still find that you struggle to afford the monthly mortgage payment due unless you have significant savings or your income increases. It is often advised that you do not try to purchase a house when you lack the salary needed to purchase it though, as there is no guarantee that your salary will increase, and failing to make the monthly mortgage payments could mean that you lose your house – even one or two failed monthly payments could be a huge disaster in this case.
What if I am self employed?
Getting a mortgage can have additional difficulties if you are self employed. It is harder to prove your gross income when you are self employed as this varies depending on how well your business or self employment is going. You may also find it harder to how your monthly take home pay as self employed taxes can be more difficult thanks to tax deductions. However, there are some specialist mortgage providers that can help with mortgages for people with a self employed income as their primary income.
Can my partner help make the payments?
Again, if you are looking at buying a property with your partner or spouse, or another person, you will usually find that their annual income gets added to the mortgage application to see whether or not you can afford the loan. Of course, more people afford a house when they buy it with someone else. Again, you should make sure that both you and your partner are happy buying the house together and you should have a plan for how you will make the monthly payments. An affordability calculator can help here too.
How do I find a mortgage with lower monthly payments?
Everyone wants the best mortgage deal they can find since we all end up paying so much money on a mortgage. The interest rate on your loan will largely impact the monthly payment you have to make each month. It is always worth shopping around to find a mortgage deal with lower interest rates. You may find that you can compare mortgages, or you may prefer to find a financial advisor or mortgage broker.
Another thing that affects the cost of your monthly payment is the loan term. If you have a mortgage that aims to have your house paid for within 20 years, you will find that this needs higher monthly payments than a mortgage that has a loan term of 30 or 40 years. Of course, if you are over a certain age you may find that you do not qualify for mortgages with a longer loan term, or you may want to have a shorter loan term in order to own the house outright as soon as possible, but you should always consider longer term loans if you think you will struggle with the monthly payment.
What other costs do I need to consider?
As well as the down payment and the monthly payment on the mortgage, you need to consider some other expenses. Firstly, if you have a variable mortgage you may need to account for the change in interest rates over the course of your mortgage.
Normal expenses need to be covered
You of course still need money to meet your normal expenses – life goes on even if you have just bought a home, and you will need to afford tax, medical bills, food, utilities, car payments, and anything else.
Speaking of tax, you will also need to look at property taxes. Sometimes property taxes may be included in your monthly payments, but sometimes they are not, so you need to look at this. If your property taxes are not included in the mortgage, you should add this to a list of monthly outgoings to compare against your monthly income.
You will also need to look at house insurance. Most mortgages have an agreement that you need to have home insurance – this protects the house against floods, fires, or other disasters that could massively impact the value of the house, so most banks or mortgage providers will require home insurance to protect their investment in your mortgage. Some mortgages include home insurance, but again, you should check whether you need to take home insurance out separately.
Fees for buying a house
Many home purchases also come with various fees – real estate agent fees, mortgage fees, and the cost of having the building inspected (which is always a good idea, to avoid any nasty surprises down the road). These all need to be accounted for, and almost all of them will need to be paid up front rather than on monthly payments like the mortgage.
Another large expense that people often find when they buy a flat or a house is the cost of repairs or refurbishments. If you are buying your dream home, you want it to be just right for you, and that can include everything from repainting to ripping out a kitchen and installing a new one. All of this can get very expensive though. One way around this is to plan when and how you will do the refurbishment. Any immediate problems with the property would need to be fixed sooner than aesthetic issues, giving you some leeway to spread out those costs.
Sometimes you can add some of these expenses to your mortgage, which can make them easier for some people to manage – if they are part of a monthly payment, then you do not have to cover the cost all at once. However, this means you will have a higher mortgage value and you will be paying more in the long run after you consider interest rates on that higher mortgage value.
Could I find a cheaper house?
Whether you have found that your maximum purchase price is lower than $700k, or whether you want to keep your options open and not buy a house that is quite that expensive, you may be wondering how to find a cheaper house that suits your needs.
One of the biggest things that changes a house price is how much house you are trying to buy. If you are looking at a property with four surplus guest rooms and a huge garage, you will find that this is more expensive than a more modest house – one way to find a cheaper house is to consider what size property you really need, and look at smaller houses if you can.
Another factor that determines the house price is the amenities. Pools can be appealing, but they add extra expense to a house. If you do not think you will use it, then it may be worth looking for somewhere without this expensive add-on.
Finally, the biggest factor on a house’s price is the location. Location really is everything – if you are looking for a $700k house in rural Oregon you will get a much nicer house than you would for $700k in San Francisco – in fact, the average house price in San Francisco is roughly $1.3million. A lot of people might expect a million dollar home to be a mansion, but you would need to be in the right location to get that kind of house. So, if you want a house with a lower cost, more suitable to a lower monthly income, you could consider moving to other areas.
Can I afford a $700k home?
There is a lot to consider when you are looking at what kind of home you can afford. It can be disheartening to look at the figures if you worry that you cannot afford the home of your dreams. However, it is vitally important to check your debt to income ratio, the income needed for the house you want, and the state of your savings. There is nothing quite so disheartening as having your home repossessed for defaulting on payments, so you should do everything you can to avoid buying a property that is above your means.
Of course, if you want to buy a more expensive property, you can look at ways to budget more and save up more money to get yourself closer to affording the home you want. There are ways for almost everyone to save up money, no matter what their pre-tax income is, though saving will be easier for some people than others. Still, you can use financial mantras and smart budgeting to help yourself get closer to your dreams.
At the same time, you should consider that sometimes renting a property can be more expensive than buying – many people find that their rental fees are more than they would have to pay on a mortgage, and renting does not help you build any equity. If you want a $700k house but cannot afford it yet, you might find that you can trade up – if you buy a cheaper house and that house increases in value, this can be a good way to build equity and work towards buying the home you could not previously afford. Still, you should be careful as properties can drop in value as well as increase.