Buying a home is an exciting prospect, yet it is easy for first-time homebuyers in the Golden State to feel overwhelmed after learning how much money down payments require.
Mortgages issued by lenders require an investment of capital from buyers to secure financing, and the type of loan dictates the required down payment. Buyer’s brokers commonly field questions about how much should be saved up for a down payment when buying a home in California, and the answers differ for all buyers.
To help point aspiring homeowners in the right direction, the team at Prevu Real Estate gathered the answers to the key topics buyers ask about when saving for a down payment.
What is a down payment for a mortgage?
Unless you are lucky enough to be able to make an all-cash offer, California buyers will need to save up a sizable portion of funds for a down payment when using mortgage financing.
Lenders provide financing for hundreds of thousands, if not millions of dollarswhen you purchase a home. In turn, buyers put up a portion of the funds for the purchase to gain initial equity in the property. But each mortgage option is different, and homebuyers have to figure out what financing options work for them. More money put down at closing means less money spent on monthly mortgage payments and the associated interest.
As such, Californians thinking of purchasing property should create a budget and begin saving for a down payment well in advance of deciding to buy a home.
How much do you need as a down payment for a house in California?
The average down payment for a house in California typically ranges between 15% to 20% of the purchase price, but can vary depending on your mortgage lender and financial situation.
For example, if you purchase a $1,500,000 home in La Jolla, expect to make a down payment of at least $225,000 to $300,000 on average. While some buyers want to put more money down to reduce monthly payments, many first-time homebuyers in California ask how they can reduce their initial down payment.
Down payment requirements for condo purchases will vary from single family houses. Each condo building has a different set of rules based on their association. While your lender may be comfortable with lending you money with a low percentage down payment, many condo buildings have maximum financing restrictions. Generally, condos require owners to purchase with a minimum down payment of 10%, or 90% max financing, but this can vary from building to building.
Figuring out your credit score helps determine what percentage of purchase price lenders may require for a down payment. Before considering a home purchase, buyers should keep track of their credit score from TransUnion, Equifax, or Experian and take steps to improve their score and borrowing capability before they start their home search.
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How can you save for a down payment?
Buyers saving up for a down payment in California have to decide on a monthly budget before searching through listings. It takes time to accumulate the funds for a down payment, so it is critical to start saving as soon as possible.
Tips to save for a down payment
- Set up fixed automatic deposits each pay period
- Trim entertainment budgets
- Cut out take out dinners and cook from home
- Skip out on vacations for a year or two
How commission rebates replenish savings after closing
Commission rebates are a powerful tool for buyers who find an agent that offers them.
Legal in 40 states, including California, commission rebates enable real estate brokers to provide a percentage of their commission back to new homeowners when they purchase a home. Not all brokers offer commission rebates, which is why buyers should ask about them when interviewing a potential buyer’s agent.
Prevu Real Estate offers the highest commission rebate in California, and buyers can receive up to half of the buyer's broker commission through the company’sSmart Buyer Rebate.
Buyers emboldened by a commission rebate can make higher offers or use the funds to replenish their savings after their down payment.
Can a family member assist with down payments?
While some buyers in California may pursue down payment assistance programs if they qualify, others turn to family for help with their down payment and closing costs.
As home prices rise, there is a growing trend of first time home buyers getting help from parents or other family members in the form of a gift. Many lenders allow gifting so long as a buyer’s financial situation justifies the loan during underwriting.
When receiving a gift toward a down payment on a home, it is important to document it appropriately. If you are lucky enough to have a generous family member, ask your real estate agent and mortgage lender in advance what information they will require to document the down payment gift.
Can you borrow from your retirement plan for a down payment?
Another option to assist with down payments is to borrow from a 401(k) plan, but California buyers should consult with their agent before dipping into their retirement plan.
Generally, lenders allow buyers to use their retirement savings, but they must be alerted when applying for a mortgage as it can trigger additional costs. Buyers can withdraw from a 401(k), but may incur early 10% withdrawal penalties if the buyer is under 59. Plus, the beneficiary must pay income tax on the money taken out and consider that the added income can place them in a higher tax bracket.
When tapping into retirement accounts, most buyers elect to borrow against their 401(k). So long as a buyer borrows the money to purchase a home, they can borrow half of the vested account value or $50,000, whichever is less. Borrowers must pay the amount back within five years. But buyers should only employ their 401(k) if they know they are secure in their career.
Borrowers who leave their job must pay the loan back at the due date of their next federal income tax date. A failure to do so incurs the same penalties levied against buyers who make a withdrawal from their 401(k).
What mortgage programs allow for low down payments?
Every aspiring homeowner has different financial situations, and California buyers must consider what home loan aligns with their long-term goals.
Buyers can start by figuring out how much they can afford to pay each month and set savings goals based on their target purchase price. Buying a home gives you equity in a long-term investment, but not all buyers can afford costly down payments and closing costs.
The Federal Housing Administration offers FHA loans to first-time buyers, where homebuyers only have to contribute a down payment of 3.5% of the purchase price. FHA loans are enticing for buyers who need capital after closing a deal, but not all buyers qualify for these programs. If a single Californian is purchasing a home for themselves, they must make less than $95K. Two people buying a house together cannot earn over $150,000 combined before taxes if they plan to use FHA loans.
Veterans also have access to special loan options. VA loan programs from the Department of Veterans Affairs provide access to zero percent down at closing, so long as buyers stay within financial limits set on a county by county basis.
How do down payment percentages affect private mortgage insurance?
Buyers seeking a conventional mortgage loan with low down payments will likely require PMI - more formally known as private mortgage insurance. PMI is required when a buyer requests a loan from a mortgage lender with a down payment of less than 20%.
Once you request a mortgage with a down payment lower than 20%, the lender will arrange PMI with an insurance broker and layer the insurance cost into the transaction. Buyers can either pay a monthly premium for the insurance or a one-time upfront premium when a deal closes. Some lenders provide conventional loans and will not require PMI, but the interest rate may vary as a result.
But not all buyers want to lower their down payment, as providing more equity upfront reduces interest rates and chips away at the principal. Regardless of the type of loan, buyers should shop around when looking for mortgages.
Prevu Real Estate, Inc. is a licensed real estate broker in California, license number 02134758.
