First-time home buyers in California tend to have a lot of questions regarding down payments. One of the most common questions is: How much should I put down on my first home in California? Here is some information to help you answer this important question.
What’s the Least I Can Put Down When Buying a Home?
Different mortgage programs have different requirements as far as the minimum down payment. This is something we’ve covered in the past. Here’s a quick recap, fully updated for 2018:
- Conventional loans (that are not insured or guaranteed by the government) allow borrowers to make a down payment as low as 3% in some cases.
- The FHA loan program requires home buyers in California to make a minimum down payment of 3.5% of the purchase price or appraised value.
- The VA loan program for military members and veterans offers financing up to 100%. Borrowers don’t have to put anything down, if they stay within their county-specific loan limits.
- Learn more about low down payment options available in the state.
That’s a quick overview of the minimum requirements for different loan programs. But how much should you put down when buying your first home in California? Should you put down more than the minimum amounts listed above?
This will depend on several factors, including your housing budget and your long-term plans. It’s also important to consider the relationship between the down payment and mortgage insurance. So let’s talk about that next.
When Mortgage Insurance Is Required
California home buyers who make smaller down payments are often required to pay mortgage insurance. This is a unique kind of insurance that protects banks and lenders from default-related losses.
The general rule is that when the borrower’s loan-to-value ratio rises above 80%, mortgage insurance will be required. This is a standard industry requirement that has been around for a long time.
Some home buyers who can afford to do so choose to put down 20% of the purchase price, or more. They do this to avoid paying mortgage insurance, which is an added cost that can increase the size of the monthly payments.
But there’s an upside to these insurance policies. Without them, the typical home buyer in California would have to wait longer and put more money down when making a purchase. As we wrote in a previous blog post, thousands of people in California benefit from mortgage insurance every year.
The take-home message here is that if you put down less than 20% when buying your first home in California, you’ll probably end up with a loan-to-value ratio above 80%. And that might require mortgage insurance.
Mortgage Rates, Closing Costs, and Gift Money
The size of your down payment could also affect your mortgage rate. Banks and lenders assign interest rates partly based on the amount of perceived risk. That’s why borrowers with excellent credit and larger down payments tend to qualify for lower mortgage rates.
It’s also important to remember that you might have other expenses when buying your first home in California, and this can affect your down payment capacity. Most buyers have to pay closing costs when buying a house. These costs can vary, but they typically range from about 3% to 5% of the purchase price.
And then there are moving expenses and other logistical costs associated with a home purchase. These are all important considerations when trying to determine how much you should put down when buying a home in California.
Borrowers with limited funds might be happy to know that they can use money from a third party, such as a family member or close friend. This is referred to as a down payment gift. Most of the home loan programs available to California borrowers today allow for gift money from approved third-party donors.