Highlights from this mortgage industry update:
- Most first-time buyers in California opt for a low down payment.
- That’s based on a recent report from an industry group.
- In this context, “low” means putting less than 20% down on a home purchase.
- Private mortgage insurance (PMI) is what makes this possible.
- California is one of the top states for low down payments w/ PMI.
Think you need a 20% down payment to buy your first home in California? Think again. As it turns out, most first-time home buyers in California use a low down payment to buy a house — sometimes as low as 3%. And mortgage insurance is what makes this possible.
Without this type of insurance backing, it would take a typical home buyer in California a significantly longer time to save up for a down payment. Fortunately, that’s usually not necessary.
Most First-Time Buyers Make Low Down Payments
In June of 2020, U.S. Mortgage Insurers (USMI) published its annual state-by-state report on mortgage loans with low down payments. USMI is an association that represents many of the private mortgage insurance (PMI) companies in California and nationwide.
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Their report showed that the number of low down payment mortgage loans backed with PMI rose by nearly 23% in 2019, compared to the previous year. Rising home values have something to do with that.
In 2019, the majority (68%) of first-time home buyers in California used mortgage insurance to qualify for a lower down payment on their loans. That’s according to the USMI report mentioned above.
The organization also found that it would take a typical home buyer an average of 21 years to save up for a 20% down payment, but only seven years to save for a 5% down payment. A substantial difference.
In other words: Without the low down payment mortgage option made possible through PMI, home buyers in California and across the country would have to wait a lot longer to save up for a down payment. In fact, homeownership would simply be out of reach for a lot of folks.
As it turns out, California is one of the top five states for mortgage loans with a low down payment. Texas, Florida, Illinois and Ohio rounded out the top five.
A Helpful Tool in Pricey Real Estate Markets
Being able to put less money down has always appealed to first-time home buyers in California. But now, with the current economic downturn resulting from the COVID-19 pandemic, it’s more important than ever.
“Last year, over 1.3 million homeowners purchased a home or refinanced an existing mortgage with less than a 20 percent down payment using private mortgage insurance,” said Lindsey Johnson, president of USMI. “Given the current economic environment … low down payment loans are more important than ever. Loans backed by private MI are a great option as a time-tested means for accessing homeownership sooner…”
California is a high-cost state. This is another reason why many home buyers cannot afford to put 20% down on a purchase. Buyers who fall into that category are often willing to take on the added cost of mortgage insurance, in order to qualify for a low down payment loan.
As of May 2020, the median home prices in California was around $575,000. That’s jut the median, or midpoint. Home prices are much higher than that in the coastal areas of SoCal and the San Francisco Bay Area.
The point is, a 20% down payment on a California home purchase can add up to a significant sum of money — more than a lot of people can afford. So the ability to put less money down (with PMI) removes a big obstacles for some California home buyers.
The graphic below, created by USMI, offers a snapshot of mortgage insurance trends in our state:
As you can see from that last figure, a higher percentage of first-time home buyers in California use mortgage insurance to secure a lower down payment. Our higher cost of living has a lot to do with that difference.
Putting 20% Down to Avoid PMI
You might wonder why the 20% down payment is mentioned so often in real estate and mortgage-related news stories. The reason has to do with mortgage insurance.
Borrowers who put down less than 20% on a home purchase usually end up with a loan-to-value ratio above 80%. (Unless they use a piggyback mortgage strategy.) Having an LTV ratio over 80% is what triggers mortgage insurance in the first place. Some borrowers choose to make a down payment of 20% or more to avoid PMI.
In a few cases, a California home buyer might be required to put 20% down when taking out a mortgage loan. This is often the case for borrowers who use jumbo loans to purchase high-end properties. But those scenarios are less common.
The key takeaway is that the 20% down payment is not required across the board. Many home buyers in California (and most first-time buyers) put down less than 20% on their purchases. And it’s mortgage insurance that makes it possible.