A lot of first-time home buyers in California lack the funds needed to make a large down payment on a home purchase. So many of them turn to low-down-payment mortgage programs such as the Federal Housing Administration (FHA) loan program.
In fact, an August 2018 report published by the Urban Institute showed that first-time home buyers account for about 83% of all FHA loan originations in today’s mortgage market. This is largely due to the relatively low 3.5% down payment that’s allowed under this program.
Most FHA Loans Go to First-Time Home Buyers
Earlier this month, the Urban Institute (a think tank group focused on economic issues) published a report that covered a variety of mortgage and home buying topics. Among other things, it included details about the share of FHA loans that goes to first-time home buyers.
Here’s a relevant quote from that report:
“The Federal Housing Administration (FHA), which makes low-down payment loans available to borrowers with less than perfect credit, has typically focused on the first-time homebuyer market, with first-timers making up about 80 percent of their total originations. That share fell to around 75 percent during the recession but has slowly crept up to nearly 83 percent today.”
Many first-time home buyers in California use the FHA loan program because it offers flexible qualification criteria and a fairly low down payment. Both of these features are appealing to borrowers in California, and in other states across the country.
Low Down Payment, Flexible Criteria
It’s clear from the 83% statistic mentioned earlier that a lot of California first-time buyers use FHA loans to buy a home. But why? What’s the primary appeal that brings borrowers to this program.
Here are two of the most attractive features for borrowers:
- The FHA loan program offers a relatively low minimum down payment. Home buyers in California who use this program can put down as little as 3% of the purchase price or appraised value. That’s one of the lowest minimum investments you’ll find (outside of the VA’s zero-down-payment option for military folks).
- The FHA loan program is also somewhat “forgiving” when it comes to debt level, credit scores, and other qualification criteria. California first-time buyers with credit issues in the past often turn to this financing option.
Some Conventional Loans Offer Low Down Payments
For many years, the FHA program was the go-to option for home buyers seeking a low down payment financing option. That’s because most conventional loans (those that are not insured by the government) traditionally required more money down — usually 5% or more.
But things have changed over the last couple of years.
These days, the government-sponsored mortgage buyers Freddie Mac and Fannie Mae are purchasing mortgages with loan-to-value ratios up to 97%. Inversely, this means that borrowers who qualify for these home loans can put down as little as 3%.
As a result of this trend, conventional loans have begun to compete with FHA for borrowers who have limited funds for a down payment. And that includes many first-time buyers.
The bottom line: Many first-time home buyers in California use the FHA loan program because it offers a relatively low down payment of 3.5%. But there are other good options out there as well. That’s why it is so important to speak with a knowledgeable mortgage professional about your financing needs.