Making Sense of Your California Home Down Payment: Expert Advice from Local Mortgage Advisor Ted Aanestad
When you’re in the market for a new home—especially as a first-time buyer—you’ve always got numbers on your mind: home prices, mortgage rates, and your savings account. And in the midst of all this, there’s probably one big question you’re asking: just how much do I need as a down payment for a house in California?
It’s a valid question, and it’s one of the most common ones Ted Aanestad hears in his work as a mortgage broker and branch manager at 101 Home Loans.
While it’s common, it’s a complex question to answer. To help make sense of it, we talked to Ted about what homebuyers can expect when it comes to California down payments.
Here’s what he shared with us.
SOMO Village: You’ve advised a lot of people on their California home down payments. What’s the most common misconception you hear?
Ted Aanestad: The biggest misconception out there is that you need to put 20% down for your down payment. And the reason that 20% number comes up is because, if you put less than that down on any loan product, you have to pay what’s called mortgage insurance.
But there are different loan products out there that determine how much you need to put down for your home, and it really depends on you specific needs, goals, and situation.
So, if it’s not 20%, how much do you need for your California down payment?
Once we break down the 20% misconception, the most common question I get is: what’s the lowest amount I can put down for a down payment?
I think that question is reflective of the current economic climate. Stockpiling cash is really hard right now and, for most people, it’s easier to think about meeting monthly payments rather than setting aside a large sum for their California home down payment.
So, the amount you need to put down varies significantly based on the different loans available and whether they’re applicable to you.
But basically, there are a few different options:
- First-Time Homebuyers Loan (FHA): Requires as little as a 3.5% down payment.
- Conventional loan: Requires as little as a 3-5% down payment, depending on your income.
- VA loan: Veterans can put 0% down and are also not required to have mortgage insurance.
The mortgage insurance for any of these loans are also different.
For example, on an FHA loan, your mortgage insurance is always built at the same basis points.
But on a conventional loan, your mortgage insurance is referred to as PMI, or privatized mortgage insurance, and so conventional loans will have insurance that changes based on the loan value, how much you’re putting down, and your FICO score.
The type of loan you get will depend on your individual situation and qualifications. We look at each scenario a couple diffrent couple ways to make sure that we’re making the best decision for you when it comes to the products that are available to you and your goals.
Let’s say one person has a goal to purchase a house that is their forever home and another person has a goal to buy something that’s a stepping stone to something else.
The way we’re selecting the product and pricing, and the amount we’re going to put down as a downpayment, will be different in each scenario.
Besides the down payment, what other fees do homebuyers need to be aware of?
We talked a bit about mortgage insurance already, which is something people don’t always realize exists when you put less than 20% down.
But there is also such a thing as one-time mortgage insurance, which allows you to pay it up-front rather than throughout the life of your mortgage. This is a good option for some people who still have some cash set aside and want to decrease those monthly payments in the future without having to put the full 20% down.
Besides that, you’ll also have homebuyer closing costs on top of a down payment. This is something that a lot of people don’t realize but is an important consideration in the whole discussion.
Closing costs typically include:
- Lender fees
- Escrow fees
- Prepaid taxes
- Prepaid insurance
A lot of people don’t realize the impact closing costs have on how much money they’ll actually bring to their California home down payment, so it’s an important thing to discuss with a mortgage broker early on.
How can homebuyers decide how much they need for a down payment for a house in California?
The first step is to meet with a mortgage advisor as far in advance as possible.
If you can have a conversation early on about your financial situation and what you can afford to buy, you’re setting yourself up for success.
From there, we’re going to talk about a few things, starting with the different loan programs I mentioned earlier. Then we’ll look at things like your savings (or what you’re using for a down payment), income, and credit score.
This is all a very personalized conversation, as each person’s situation is different.
When it comes down to it, your qualifications are what will determine how much you can and should put down as a down payment for a house in California.
Your FICO score, for example, can impact both how much mortgage insurance you pay and what kind of interest rates you can get.
Let’s say someone has enough to put more than 3% to 5% down—should they?
Deciding how much to put down is a complex process, so I always talk to people about their goals and look at their finances holistically.
I never want my clients to be house-broke. I’d rather they have at least some sort of reserves in case of layoffs or other unexpected life circumstances.
So, if a higher down payment for a house in California is stretching them too thin, I don’t recommend it.
We also always want to look at the market and factor in future predictions. Two key things to look at are:
- Do we expect interest rates to be going up or down in the next couple of years?
- Where do we see appreciation going?
These two external factors can make a big impact on how much to put down as a down payment on a house in California.
If interest rates change, for example, you might be refinancing in a few years and don’t necessarily want to tie up all your equity.
Looking at appreciation is also important. New home developments and the people who first buy them are going to see the most appreciation.
This is especially true of an area like SOMO Village where they are creating a new downtown hub in Rohnert Park.
Right now, the prices in this area are lower than nearby towns like Santa Rosa, Petaluma, or Healdsburg, because it doesn’t have that downtown yet.
But as SOMO Village and Rohnert Park grow, the values are going to jump significantly.
We take all this into consideration when determining how much money you need for a down payment for a house in California.
Are there differences when it comes to presale home vs. resale home California down payments?
The process of getting pre-approved for a mortgage and figuring out a down payment is very similar in both scenarios.
The main difference is that you’re going to have more control over a house that’s not built yet. Buying a presale home means you can pick some of the finishes and design elements as it’s being constructed. But it’s important to remember that any customization or high-end finishes might increase your purchase price and, ultimately, how much you have to put down as a result.
Are there any benefits of putting down a down payment on a presale home?
There can be. Every single time we pre-approve someone for a pre-sale home, we want to make sure it’s going to work out. And the earlier you start preparing for a home purchase, the better.
So, for some people, putting money down for a presale home is a good option because it gives them more time to prepare.
For example, the better your credit score, the better your interest rates. If you buy something pre-sale, you have all that building time to work on improving your credit in the best position during the time. You can save more money, pay down your credit cards, or figure out what you need to do as a self-employed person.
Even if you’re feeling ready, but not 100% there, you can still get your California house down payment in place for a presale home and then have time to get prepared before it’s completed.
If you’re considering buying a home and want to know more about your lending options and how much you need for a down payment for a house in California, reach out to Ted and his team at 101 Home Loans or reach out by email or phone: Ted@101homeloans.com or (707) 477-0945.
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About Ted Aanestad
Ted is a local Sonoma County mortgage advisor who’s worked in lending for over 10 years. In that time, he’s worked with countless clients to determine the right down payment for a house in California, get approved for a loan, and purchase their dream home.