What are the requirements for buying a house in California? What do I need in order to qualify for a mortgage loan? These are two of the most common questions among home buyers in the Golden State, and you’ll find answers to both of them below.
Requirements to Buy a House in California
When it comes to home-buying requirements, there’s a big difference between all-cash buyers and those who are using a mortgage loan.
- People paying cash for a home don’t require mortgage financing, so most of the items below don’t apply to them.
- But the majority of buyers in California do use mortgage loans when purchasing a home. So we’ll be addressing that audience today.
With that audience statement out of the way, here are some of the key requirements to buy a home in California:
1. Saving for a down payment.
A down payment is usually (but not always) required when buying a house in California. They can range from 3% to 20% of the purchase price, depending on the type of loan being used and other factors. Military members and veterans can often qualify for VA home loans, which offer 100% financing. The FHA loan program, which is particularly popular among first-time buyers in California, allows borrowers to put 3.5% down.
While down payments are a common requirement to buy a home in California, the money doesn’t necessarily have to come out of your own pocket. These days, many loan programs allow for the use of down payment gifts. This is when a friend, family member, employer, or other approved “donor” gives you money to cover some or all of your upfront investment.
2. Maintaining good credit.
Credit scores are another key requirement when buying a house in California. You’ve probably heard about the importance of having good credit, when it comes to getting a loan. Borrowers with higher credit scores generally have an easier time qualifying for mortgage financing, and tend to get better interest rates as well.
There is no single cutoff point used by banks and mortgage companies. It varies from one to the next. With that being said, most lenders today prefer to see a score of 600 or higher from borrowers seeking a home loan. But that’s just a general trend — it’s not written in stone.
The bottom line is that a higher score will improve your chances of buying a home in California, when using a mortgage loan.
3. Managing your debt load.
The amount of debt you have can also affect your ability to obtain mortgage financing. So it’s another key requirement to buying a house in California. Specifically, it’s the ratio between your total recurring debts and your monthly income that really matters.
In lending lingo, this is referred to as the debt-to-income ratio. This ratio shows how much of your income is going toward your monthly debts. It helps mortgage companies ensure that you’re not taking on too much debt (with the addition of a home loan).
As with credit scores, this is a California home-buying requirement that can vary from one mortgage company to the next. Ideally, your overall debt-to-income ratio should fall below 43%. But that’s not a hard-and-fast rule. Other factors are taken into account as well.
4. Rounding up your financial documents.
Documentation is a common requirement to buy a home in California. When you apply for a home loan, you’ll be asked for a wide variety of financial documents. The lender will use these to verify your income and assets, your borrowing history, and other aspects of your financial picture.
Commonly requested documents include recent bank statements, tax returns and W-2 forms for the last two years, pay stubs, and other finance-related paperwork. Self-employed borrowers might have to provide additional documents, such as a profit-and-loss (P&L) statement.
5. Having the home appraised.
If you’re using a mortgage loan to buy a home in California, there’s a good chance the property will be appraised prior to funding. Thus, the home appraisal is another key requirement when buying a house.
During this process, a licensed and trained home appraiser will visit the home and evaluate it inside and out. The appraiser will then provide an estimate of the property’s value in the current real estate market. The lender wants to ensure that the amount being paid for the property reflects the true market value.
As a home buyer, there’s really not much for you to do during the appraisal process. The lender will schedule it, and the appraiser will send his or her report back to the lender. It’s just something to be aware of.
The home appraisal also underscores the importance of making a smart offer based on current market conditions. If you offer an amount that is well above market value, the property might not appraise for the agreed-upon purchase price. This can create an obstacle to mortgage approval.
So there you have them, five of the main requirements to buy a house in California.