Do you want to buy a home in California, but you’re unsure of how much you need to save to qualify for a mortgage? A home is easily one of the largest purchases you’ll make in your life, meaning you’ll likely apply for a mortgage. Most lenders require the buyer (you) to also come out of pocket, but how much can you expect to pay? How much do you need to save before applying for a loan?
FHA Loan (3.5% Down Payment)
Many buyers choose an FHA loan because the application process is straightforward and very easy. FHA lenders also have less strict credit requirements since the program was initially created to help people buy their first homes.
The current going rate for an FHA down payment is 3.5%. While you don’t necessarily need perfect credit for an FHA loan, you may be required to pay more than 3.5% if your report has blemishes. A down payment isn’t the only FHA loan cost, either. FHA lenders require an appraisal and inspection, but these costs are usually rolled into your loan.
Conventional Loan (3% Down Payment- or More)
Conventional loans are better for relaxed appraisals or inspections. You may also be able to get better rates depending on your credit score and debt-to-income ratio with a conventional loan versus FHA. It is important to note, though, that conventional loans typically require mortgage insurance when the down payment is less than 20%, which translates to higher monthly payments for you. Some loans may also not let you drop the mortgage insurance unless you refinance, so that’s something important to consider. Avoiding mortgage insurance is one of the easiest ways to lower your mortgage payments.
Down payments on conventional loans can be as low as 3% today, but not everyone will qualify for a percentage that low. There will still be closing costs similar to an FHA loan that should be saved for, including inspections and appraisals.
Investment Loan – (No Designated Closing Costs/Down)
If you want to buy a second home, you may need to consider an investment loan. With an investment loan, you could purchase a vacation home for you and your family to enjoy for years to come. You could also invest in real estate assets through property or land that generates passive income. Lenders are understandably more strict regarding investment loans because of their higher risk. If borrowers can no longer afford their payments, they’ll let the second house go before the first.
You can’t use an investment loan to buy a personal residence, though. Investment loans are strictly for second homes. You’ll also need to put more down on an investment loan than other loan types. As a general rule, you may need at least 20% for an investment loan, but with the right credit score and financing history, you may qualify for a lower rate. Shop around, talk with multiple lenders, and find the rates that work best for your investing goals.
Jumbo Loan – (Usually Around a Minimum 10% Down Payment)
Most lenders limit how much you can borrow. A jumbo loan is sometimes used to exceed this limit. Conforming loan limits change every year and are currently set at between $766,550 and $1,149,825, depending on the property’s state and county.
Mortgages in California are typically way more expensive than in other parts of the country because of the higher cost of living. Down payment needs on a jumbo loan are primarily set by the lender. 10% is usually the lowest you’ll find, but they can be as high as 25% or 30%.
Veterans Loan – (0% Down Payment (But You’ll Still Need Closing Costs)
You served and may qualify for a zero down payment mortgage. A veterans loan is the only financing option that doesn’t require a down payment. However, not everyone can get a VA loan, as VA loans are exclusively reserved for eligible veterans. VA loans also don’t exclude you from credit score requirements, so make sure you keep up with on-time payments.
Paying for a House in Cash (No Interest)
Many real estate experts recommend paying in cash when possible. You get to skip interest and avoid strict lending requirements. Of course, not everyone has hundreds of thousands of dollars sitting around, ready to buy property. But if you do have a good chunk of cash, you might consider putting a larger down payment on a property to reduce the amount you have to borrow.
The overall closing costs on a cash purchase are also lower. You could essentially skip the appraisal and inspection if you wanted. However, this isn’t usually a good idea. Make sure you know exactly what you’re buying, whether you pay cash or take out a loan.
Make sure you have enough saved to cover the down payment requirements of the loan type you choose. It can also be helpful to talk with lenders to understand your out-of-pocket expectations so you’re ready to close.
