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Buying a Home in California With a 3% Down Payment

A lot of home buyers don’t realize it’s possible to buy a home in California with 3% down. It’s true. There are several mortgage programs designed for borrowers with limited funds in the bank. And some of them allow eligible home buyers to buy a house in California with a 3% down payment.

Today, we will examine two of these so-called “conventional 97” mortgage programs. We’ll also talk about the pros and cons of buying a house in California with 3% down.

But first, let’s debunk a common myth regarding mortgage loans, down payments, and home buying.

Fact: It’s Possible to Buy a House in California with 3% Down

Numerous surveys have shown that a lot of home buyers in California think they have to put down 20% when purchasing a home. But that’s actually far from the truth.

As we mentioned above, there are mortgage programs available that allow borrowers to buy a house in California with a 3% down payment. Last year, a study conducted by National Association of Realtors found that the typical down payment among first-time buyers in the U.S. was 6%. And that’s just the average. Some buyers put down even less. So much for that 20% myth!

Now that we’ve cleared that up, let’s look at some of the mortgage options that allow borrowers to buy a home in California with as little as 3% down. We will examine programs offered by Freddie Mac and Fannie Mae. After that, we will discuss the pros and cons of buying a house with a small down payment.

Option 1: HomeReady® Offered by Fannie Mae

Fannie Mae is one of the two government-sponsored corporations that buy mortgage loans from lenders. They also establish guidelines and requirements for the types of home loans they can purchase.

Fannie Mae works with mortgage lenders to offer a 3% down payment mortgage option known as HomeReady. This product is designed for borrowers with relatively low income, and it offers financing of up to 97% of the purchase price. California home buyers who use this program can buy a house with 3% down.

HomeReady is designed for first-time and repeat buyers. While the program is popular among first-time purchasers, it is not limited to that audience. Even those who have purchased a home in the past could qualify for this mortgage option.

According to Fannie Mae, borrowers need a credit score of 620 or higher to qualify for the program. Borrowers with scores of 680 or higher might be able to qualify for better pricing. (This is true for most mortgage programs. Higher credit scores can help borrowers qualify for better rates.)

There’s also an educational component to this mortgage option. If the person applying for the loan is a first-time home buyer, they are required to take a homeownership education course offered by an approved housing counselor. These types of courses are commonly offered at little to no cost.

Option 2: Home Possible® Offered by Freddie Mac

This is another option that allows people to buy a home in California with a 3% down payment. Freddie Mac is the other government-sponsored mortgage buyer. Their program is very similar to the one outlined above, but with fewer income restrictions. As a result, this program could potentially serve a broader range of borrowers.

Like the first option, this mortgage program is available for first-time and repeat home buyers alike. It allows for a maximum 97% loan-to-value ratio (LTV), which in turn means that borrowers can put down as little as 3% on a purchase.

The credit score requirements are also slightly different with this 3% down payment option. California home buyers would need a credit score of 660 or higher to qualify for the Home Possible program. It also has an educational requirement similar to the first program, at least for first-time buyers.

Using Gift Money to Reduce Your Upfront Costs

These two programs are fairly flexible when it comes to the down payment funds. Generally speaking, they both allow borrowers to use money provided by an approved third party. So that 3% down payment requirement mentioned above doesn’t necessarily have to come out of your own bank account. It could be gifted to you from a family member or other approved provider.

Not a lot of home buyers know about this option. So it’s worth repeating. It’s possible to buy a home in California with a 3% down payment, and some or all of that investment could be gifted to you from a third party.

Pros and Cons of a Smaller Investment

Nearly every type of mortgage loan has pros and cons associated with it. The one possible exception to that “rule” is the VA loan program, which offers many benefits but few downsides. But that’s the subject of another article.

Along those lines, there are pros and cons to buying a home in California with a 3% down payment. The obvious upside is that you could purchase a home with less money down, which means you don’t have to wait as long. That’s a pretty big benefit for cash-strapped home buyers

But there’s a downside as well. Borrowers who put down 3% on a conventional mortgage loan (like those described above) usually have to pay for private mortgage insurance, or PMI.

Private mortgage insurance is a standard requirement across the industry. There are ways to avoid this added cost, and we’ve covered some of them in previous articles. But the bottom line is that California home buyers who put 3% down almost always have to pay for mortgage insurance.

The good news is that PMI won’t make a huge difference in your monthly payments. But it does increase your overall housing costs, so it’s something to consider.

Without PMI, most home buyers in California would have to put at least 20% down on a home purchase. So, in a sense, PMI is both a blessing and a curse. Yes, it’s an added cost that will increase the size of your monthly payments. But it also allows home buyers with limited funds to purchase a home sooner rather than later.

Let’s Explore Your Financing Options

So there you have it, two ways to buy a home in California with a down payment as low as 3%. These aren’t the only options for borrowers. There are other mortgage programs with a low upfront investment, including the FHA loan program. But we’ve covered those topics elsewhere on our blog.

Have questions? Located in the Bay Area, Bridgepoint Funding serves the entire state of California and offers a broad range of mortgage financing options. Please contact us if you have questions about buying a home with 3% down, or other mortgage-related topics. Our knowledgeable staff can review your financial situation and home-buying goals in order to choose the best path forward.

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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