More Than 25% of California Homes Were Bought with Down Payments of 3.5% or Less
A research report compiled by the Urban Institute shows that almost 30% of home buyers in California purchased a home with a down payment of 3.5% or less in 2017. Home buyers who put down 20% or more represented 42% of transactions.
These statistics show more proof to quash the popular myth that all home buyers are required to put 20% down when purchasing a home.
The younger sisters and brothers of Millenials, Generation Z’s (people born from 1995 to 2010), are still optimistic about becoming a homeowner. Approximately 83 percent have plans to purchase a home within the next 5 years, according to a new study by PropertyShark. The good news is 54% of home buyers were people who did not own a home in the last three years.
The finalized down payment data for 2018 is not available at the time this article was published.
In today’s lending environment, borrowers have more options available if they’re seeking a down payment in the 3% area and have respectable credit scores and payment history.
FHA loans used to be single most popular means to achieve that goal. In recent times, however, thanks to guideline changes made by Freddie Mac and Fannie Mae, conventional loan programs also offer down payments in that compete with FHA.
Why Some Borrowers Choose a Larger Down Payment
Some borrowers prefer to make a larger upfront investment and have valid reasons for doing so such as:
To lower the loan amount, which lowers their monthly payments.
To avoid paying for mortgage insurance, which is commonly required when the loan-to-value ratio is over 80%.
But many home buyers in California are not able to come up with a 20% down payment on a home. As of October 25, 2018 according to Zillow data, the median home price in Orange County is $721,000. That would mean a home buyer needs to invest $142,000 as a down payment.
The Urban Institute’s study discovered that 19 million Millennials renting in California and across the country could afford to own a home with a 3.5 percent down payment and a 5.1 percent mortgage rate.
The reason why so many young households are still renting is frustrating, but not shocking. The study revealed that 65 percent of renters still think in order to buy a house they’ll need a 15 percent or higher down payment. Unfortunately, those same renters tend to have a difficulty to save up a 20 percent down payment. As the years pass and they continue to rent, they’ll likely experience rising rents, rising home prices and higher mortgage rates will each make homeownership less affordable. (Source: Down Payment Resource)
Thankfully, there are loan programs that allow a much smaller investment from the buyer.
The following are three examples of financing options with a lower down payment:
FHA 96.5% financing: The Federal Housing Administration (FHA) loan program requires a minimum investment of 3.5%, with a maximum loan-to-value ratio of 96.5%. Borrowers who want to use this govt. insured loan are required to have a minimum credit score of 580 or above per HUD guidelines. Interest rates tend to be lower by .25-.375% than conventional loan but also have mortgage insurance for the life of the loan.
Conventional 97% financing: A conventional mortgage loan (non-government-backed) for eligible home buyers in California to pay a down payment of only 3% of the home’s value. That’s a higher level of financing than in years past, which is good news for borrowers. Mortgage insurance is required until the loan-to-value ratio is 78% or less.
VA 100% financing: In case you happen to be a military veteran or serving active duty, there’s a high probability you may qualify for a VA home loan (govt. backed). This loan program offers financing of up to 100%, has lower rates than FHA or conventional loans and there’s no mortgage insurance necessary. It is all good with this loan for people with an honorable military service record.
