Most first-Time Buyers in California Use Mortgage Insurance

Highlights from this mortgage industry update:

• Most first-time buyers in California opt for a low down payment.
• That’s based on a recent report from an industry group.
• In this context, “low” means putting less than 20% down on a home purchase.
• Private mortgage insurance (PMI) is what makes this possible.
• California is one of the top states for low down payments w/ PMI.

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Think you need a 20% down payment to buy your first home in California? Think again. As it turns out, most first-time home buyers in California use a low down payment to buy a house — sometimes as low as 3%. And mortgage insurance is what makes this possible.

Without this type of insurance backing, it would take a typical home buyer in California a significantly longer time to save up for a down payment. Fortunately, that’s usually not necessary.

Most First-Time Buyers Make Low Down Payments

In June of 2020, U.S. Mortgage Insurers (USMI) published its annual state-by-state report on mortgage loans with low down payments. USMI is an association that represents many of the private mortgage insurance (PMI) companies in California and nationwide.

Their report showed that the number of low down payment mortgage loans backed with PMI rose by nearly 23% in 2019, compared to the previous year. Rising home values have something to do with that.

In 2019, the majority (68%) of first-time home buyers in California used mortgage insurance to qualify for a lower down payment on their loans. That’s according to the USMI report mentioned above.

The organization also found that it would take a typical home buyer an average of 21 years to save up for a 20% down payment, but only seven years to save for a 5% down payment. A substantial difference.

In other words: Without the low down payment mortgage option made possible through PMI, home buyers in California and across the country would have to wait a lot longer to save up for a down payment. In fact, homeownership would simply be out of reach for a lot of folks.

As it turns out, California is one of the top five states for mortgage loans with a low down payment. Texas, Florida, Illinois and Ohio rounded out the top five.

A Helpful Tool in Pricey Real Estate Markets

Being able to put less money down has always appealed to first-time home buyers in California. But now, with the current economic downturn resulting from the COVID-19 pandemic, it’s more important than ever.

“Last year, over 1.3 million homeowners purchased a home or refinanced an existing mortgage with less than a 20 percent down payment using private mortgage insurance,” said Lindsey Johnson, president of USMI. “Given the current economic environment … low down payment loans are more important than ever. Loans backed by private MI are a great option as a time-tested means for accessing homeownership sooner…”

California is a high-cost state. This is another reason why many home buyers cannot afford to put 20% down on a purchase. Buyers who fall into that category are often willing to take on the added cost of mortgage insurance, in order to qualify for a low down payment loan.

As of May 2020, the median home prices in California was around $575,000. That’s jut the median, or midpoint. Home prices are much higher than that in the coastal areas of SoCal and the San Francisco Bay Area.

The point is, a 20% down payment on a California home purchase can add up to a significant sum of money — more than a lot of people can afford. So the ability to put less money down (with PMI) removes a big obstacles for some California home buyers.

The graphic below, created by USMI, offers a snapshot of mortgage insurance trends in our state:

As you can see from that last figure, a higher percentage of first-time home buyers in California use mortgage insurance to secure a lower down payment. Our higher cost of living has a lot to do with that difference.

Related: A guide to PMI in California

Putting 20% Down to Avoid PMI

You might wonder why the 20% down payment is mentioned so often in real estate and mortgage-related news stories. The reason has to do with mortgage insurance.

Borrowers who put down less than 20% on a home purchase usually end up with a loan-to-value ratio above 80%. (Unless they use a piggyback mortgage strategy.) Having an LTV ratio over 80% is what triggers mortgage insurance in the first place. Some borrowers choose to make a down payment of 20% or more to avoid PMI.

In a few cases, a California home buyer might be required to put 20% down when taking out a mortgage loan. This is often the case for borrowers who use jumbo loans to purchase high-end properties. But those scenarios are less common.

The key takeaway is that the 20% down payment is not required across the board. Many home buyers in California (and most first-time buyers) put down less than 20% on their purchases. And it’s mortgage insurance that makes it possible.