Is It Hard to Get a Home Loan in California? (And Related FAQs)

“Is it hard to qualify for a home loan in California?”

This is one of the most common questions among first-time buyers in the Golden State. It’s right up there with “How much can I afford?” in terms of frequency.

For many home buyers, the biggest obstacle to homeownership is affordability, rather than strict mortgage requirements. California is home to some of the most expensive real estate markets in the country, with sizable down payments to match.

How Hard Is It to Get a Mortgage in California?

When it comes to mortgage lending requirements, getting a home loan in California is no harder than it is in any other state.

If you have a decent credit score, a manageable level of debt, and enough income to cover your monthly housing costs and other expenses, you could qualify for a mortgage.

The truth is you don’t need a spotless credit history or a huge down payment to get a home loan in the Golden State. Some mortgage programs offer low down payments and flexible qualification criteria, which makes it easier to qualify for financing.

For example, home buyers with marginal credit scores and limited savings can often qualify for government-backed loans, even if they’ve been turned down for conventional financing.

It’s the down payment that creates challenges for many buyers in California. Higher house prices bring larger down payments, requiring borrowers to save for years in some cases.

What It Takes to Qualify for a Home Loan

For some borrowers, qualifying for a home loan in California doesn’t present much of a challenge at all. But other borrowers might find it harder to secure financing.

To understand why, we have to examine some of the things that are usually needed to qualify for a mortgage loan:

1. Credit Score: Lenders typically require a minimum credit score, which can vary based on the type and size of the loan. A credit score of 620 or higher could help you qualify for most mortgage programs. Government-backed loans like FHA and VA can be more flexible.

2. Income: In California, borrowers typically have to show proof of stable income. This can be done with pay stubs, tax returns, and bank statements. Lenders prefer to see two years of steady employment and income, but exceptions can be made for well-qualified borrowers.

3. Debts: The debt-to-income (DTI) ratio compares your monthly debts to your gross monthly income. It helps lenders determine if you’re capable of taking on a mortgage obligation. The debt-to-income ratio is usually capped between 43% and 50%, depending on the loan type.

4. Down Payment: Different mortgage products have different requirements for the minimum down payment. It can range from 3% up to 20%. On average, first-time buyers in California put down 7% to 8%, but smaller down payments are available. VA loans offer 100% financing.

5. Cash to Close: In addition to the down payment, home buyers typically have to pay closing costs. These can include a variety of fees and charges. To qualify for a home loan, borrowers must show that they have the assets needed to cover these expenses.

Home buyers who can check these boxes may have an easier time getting a home loan in California. Those who fall short of these requirements might find it harder to get approved.

How to Improve Your Chances of Qualifying

Getting a home loan in California is no more difficult than in other states. Borrowers with steady income, manageable debt, and decent credit should be able to qualify with little to no trouble.

But for those who fall short of these basic requirements, some additional effort might be required. Here are some steps home buyers can take to improve their chances of getting a loan.

• Explore Loan Programs: Research all of the different mortgage programs, such as FHA or VA loans, to find one that fits your financial situation. Here’s a detailed guide to get you started.
• Save for a Down Payment: Start saving early to ensure you have enough for the down payment and closing costs.
  Improve Credit Score: If you have a low credit score, you can potentially improve it by paying all bills on time going forward and avoiding new lines of credit.
• Reduce Debt: If you currently carry a lot of debt, consider paying it down to lower your debt-to-income (DTI) ratio and overall risk profile.
• Check Credit: Regularly review your credit report for errors and dispute any inaccuracies that could negatively impact your score.
• Avoid Large Purchases: Refrain from making large purchases or taking on new debt before applying for a mortgage. It might make it harder to get a home loan.
• Maintain Employment Stability: If possible, try to stay in your current job or field to demonstrate a stable employment history.
• Limit Credit Card Usage: Keep credit card balances low to improve your credit utilization ratio. This could improve your chances of qualifying for a mortgage.
• Consider a Co-Signer: Having a co-signer with strong credit and income could help qualify for a loan, especially if your credit score is on the lower side.

The Path to Mortgage Approval

Let’s shift gears now and talk about the path to mortgage application and approval. While every lending scenario is different, most borrowers will go through the following steps when getting a home loan in California:

1. Saving Your Money

You will likely encounter some out-of-pocket expenses when using a mortgage loan to buy a home. There’s the down payment for one, and this could range from 3% to 20% of the purchase price for most borrowers. There are also various closing costs and fees you might encounter along the way. The sooner you start saving up for them, the better.

2. Creating a Budget

It’s wise to have a monthly housing budget in mind, before you start looking at homes or applying for loans. This will ensure that you don’t exceed your financial comfort zone when taking on a mortgage loan. Here’s an article that walks you through the budgeting process in detail.

3. Getting Pre-Approved for a Loan

Pre-approval occurs when a lender reviews your financial situation to determine how much you’re qualified to borrow. There are benefits to getting pre-approved for a home loan in California. Among other things, it will make sellers more inclined to accept your offer.

4. Submitting a Loan Application

Most lenders use a standardized form for this purpose. It’s called the Uniform Residential Loan Application, also known as Fannie Mae form 1003. You can view a sample application online, in PDF format, to get a feel for what it includes. Learn more about the mortgage application process.

5. Gathering Your Documents

Getting a home loan in California requires documents. Lots and lots of documents. During the application and pre-approval process, you will be asked to provide W-2 forms, tax returns, bank statements, pay stubs, and other documents relating to your finances. Lenders use them to verify your income, assets, and debts.

6. Shopping for a Home

Once you have a budget and a pre-approval amount, you can shop confidently within that price range. You can increase your chance for success by expanding your search zone, working with a real estate agent, and making a strong initial offer.

7. Mortgage Underwriting

The mortgage underwriter will analyze all aspects of the home loan to ensure it meets the lender’s requirements and any secondary program requirements (such as FHA, Freddie Mac, etc.). They’ll also evaluate the level of risk associated with the loan.

8. Resolving Any “Conditions” That Arise

If the underwriter identifies one or more issues that must be resolved, you might receive what’s known as a conditional approval. You would then have to resolve those conditions to keep the process moving forward. But it doesn’t always happen this way. Some borrowers clear the underwriting process with no additional requests or conditions.

9. Closing the Deal

When the underwriter is satisfied with all aspects of the loan, the borrower is said to be “clear to close.” This means the loan can be funded and the deal can be closed (after a lot of signatures, of course). Closing represents the last step in the process from the home buyer’s perspective.