First-time home buyers in California tend to have a lot of questions when it comes to down payment requirements. We’ve covered some of those questions in the past. Today, we will address another common query:
Can I buy a house in California with 5% down?
The short answer is yes, it’s entirely possible to buy a house in California with a 5% down payment. But there are some situations where a larger investment might be required, including borrowers who need to use a “jumbo” loan for a more expensive purchase. But for the most part, a 5% down payment is sufficient.
Buying a Home in California With 5% Down
When researching the California home buying and mortgage process, you probably heard about the 20% down payment threshold. Many borrowers across the state choose to invest 20% or more when buying a house, partly because it allows them to avoid paying mortgage insurance.
We’ll talk more about mortgage insurance a bit later. For now, just know that a 20% down payment is not always required.Here are some of the ways you could buy a house in California with just 5% down:
An FHA-Insured Mortgage With 3.5% Down Payment
The FHA home loan program is one mortgage option that allows home buyers to put down 5% or less. Specifically, this program requires borrowers to make an investment equaling at least 3.5% of the purchase price or appraised value.
This is a government-backed mortgage program, meaning lenders receive some degree of insurance protection from the federal government. As a result, the FHA loan program also tends to have more flexible qualification criteria, when compared to regular mortgages.
So that’s one way you could buy a house in California with a 5% down payment. Let’s shift gears now and talk about conventional financing options.
Conventional Financing With as Little as 3% Down
A conventional mortgage loan does not receive any kind of government backing or insurance. That makes it different from the FHA loan program we talked about above. But these mortgage loans also allow California home buyers to buy a house with 5% down.
Some of the home loans that are purchased by Freddie Mac and Fannie Mae allow for a loan-to-value (LTV) ratio up to 97%. That means the borrower could invest as little as 3%, and still qualify for financing.
So, conventional financing is another good option for home buyers in California who can only afford to put down 5% on a purchase.
VA Home Loans Offer 100% Financing
If you are a military member or veteran buying a home in California, you might qualify for the VA loan program. This is another example of a government-backed mortgage, managed by the U.S. Department of Veterans Affairs.
Among other benefits, this program allows borrowers to buy a house in California with no down payment whatsoever. You could put 5% down if you wanted to, and that would reduce the size of your monthly payments. But it’s possible to finance up to 100% with a VA loan — a major benefit over other mortgage options.
Trade-Off: Mortgage Insurance for Smaller Investment
As with many things in the mortgage lending world, making a down payment of 5% comes with a trade-off. The good news is that it allows California home buyers to buy a home with a relatively small investment. You don’t necessarily have to save up for many years to accumulate a 20% down payment.
The downside is that making a down payment of 5% on a home purchase might require you to pay mortgage insurance. This is true for both conventional and government-backed home loans. The one exception is the VA loan program, which allows borrowers to finance up to 100% without paying mortgage insurance.
The FHA program requires insurance for all borrowers.And with conventional loans, private mortgage insurance (PMI) is usually required whenever a loan accounts for more than 80% of the home value.
One way to make a small down payment on a conventional loan while avoiding PMI is to use what’s known as a piggyback mortgage strategy. This is where you use two loans to finance the home purchase, with the remainder coming in the form of a down payment.
For example, a borrower might use the 80/15/5 piggyback strategy:
- First loan = 80% of the purchase price
- Second loan = 15%
- Down payment = 5%
With this strategy, you can buy a house in California with a 5% down payment while also avoiding mortgage insurance. So it’s something worth considering, if you have limited funds for the upfront investment.
We’ve covered a lot of information in this article. The bottom line is that it’s possible to buy a house in California with 5% down, as long as you meet all other mortgage requirements. But sometimes a larger down payment is necessary, as in the case with larger jumbo home loans.
As an expert in real estate and mortgage financing, I possess comprehensive knowledge and experience in assisting individuals, particularly first-time home buyers, in navigating the complexities of purchasing a home in California. I have worked extensively in the field, staying updated with the dynamic landscape of mortgage programs, down payment options, and various financing strategies available in the housing market.
The article addresses the concern of first-time home buyers in California regarding down payment requirements. It highlights the feasibility of purchasing a house in California with a down payment as low as 5%. Here's a breakdown of the key concepts covered in the article:
-
Down Payment Requirements in California:
- The conventional belief of needing a 20% down payment is debunked, with emphasis on options requiring as little as 5% down.
- Mention of situations where larger down payments might be necessary, such as for jumbo loans.
-
Mortgage Programs Allowing 5% Down Payment: a. FHA-Insured Mortgage (3.5% Down):
- Explanation of the government-backed FHA loan program, accommodating down payments as low as 3.5%, with more flexible qualification criteria.
b. Conventional Financing (as low as 3% Down):
- Differentiation from FHA loans, mentioning specific loans purchased by Freddie Mac and Fannie Mae, allowing for a 97% loan-to-value ratio.
c. VA Home Loans (100% Financing):
- Highlighting the benefits for military members or veterans, enabling them to buy a house in California with no down payment or the option to put down 5% for reduced monthly payments.
-
Trade-Offs: Mortgage Insurance and Strategies to Avoid It:
- Discussion about mortgage insurance associated with smaller down payments, except for VA loans.
- Mention of private mortgage insurance (PMI) for conventional loans exceeding 80% of the home value.
- Introduction of a piggyback mortgage strategy (like 80/15/5), utilizing two loans to finance the home purchase, allowing a 5% down payment while bypassing mortgage insurance.
In summary, the article emphasizes that purchasing a home in California with a 5% down payment is feasible, shedding light on various mortgage programs, potential trade-offs with mortgage insurance, and strategies to navigate these financial aspects while meeting mortgage requirements. It's important to note that while a 5% down payment is an option, specific circ*mstances might necessitate larger down payments, especially for jumbo loans or to avoid mortgage insurance.
