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How Does the Down Payment on a House Work In California?

First-time home buyers in California tend to have a lot of questions about the down payment process. Today, we will focus on one of those questions in particular. How does the down payment on a house work in California?

How the Down Payment on a House Works in California

You can think of the down payment as an upfront investment on your home purchase.When buying a house in California, most buyers put some money down upfront. This money goes toward the total purchase price and is usually paid at closing.

Most, but not all, mortgage programs in California require the borrower to make a down payment on the house. Here are six frequently asked questions relating to this subject.

1. What is a down payment exactly?

As mentioned above, the down payment is money paid in advance toward a home purchase. It is usually paid at closing, along with the buyer’s other closing costs. In other words, it’s a percentage of the purchase price that you pay up front.

This will make more sense with an actual example:

Let’s say you are buying a house in California that costs $300,000. You decide to make a down payment of 10%, which comes to $30,000 of the total purchase price. That leaves $270,000 left over. You use a mortgage loan to cover that remaining $270,000.

In the scenario, the home buyer’s investment totals 10% of the purchase price, while the mortgage loan accounts for the remaining 90%. So the loan-to-value (LTV) ratio ends up being 90% in this case.

2. How much of a down payment is required in California?

In the example above, the home buyer chose to make a down payment of 10% on a house purchase in California. But that’s not a hard-and-fast rule.

Some mortgage programs allow borrowers to put down as little as 3% of the purchase price. The VA loan program, which is designed for military members and veterans, allows for 100% financing and zero down payment. And then there’s the FHA home loan program, which requires home buyers in California to make a minimum investment of 3.5% or more.

3. Can I use another loan to cover it?

Generally speaking, you cannot use a loan for the down payment on a house in California. That defeats the purpose. The goal here is for the home buyer to make some level of upfront investment in the property, which reduces the risk for the lender.

Additionally, statistics show that home buyers who make some kind of down payment are less likely to default on their mortgage loans down the road. So it wouldn’t make sense for someone to borrow the money to cover their upfront investment, through a personal loan.

That being said, there are many different acceptable sources of down payment funds when buying a house in California. You can use money from your personal savings account, your 401(k) or other investments, and a number of other sources.

In short, if it’s money or assets you already have, you can probably put it toward the down payment on a home purchase.

You could also use gift money from an approved third-party donor, such as a family member. This is a great way to offset the burden of making a down payment on a house in California. We’ve covered the gift money concept in a separate blog post. So be sure to read that if you want to learn more about this strategy.

4. When do I actually pay it?

In nearly all cases, California home buyers pay their down payment funds on or near the actual closing day. This is the day when you sign all of your documents, pay your closing costs, and eventually receive the keys to your new house. This is usually how the process works in California, but there can be exceptions to the rule.

5. Does it count toward the purchase price?

Yes. As explained above, whatever amount of money you put down at closing is applied to the overall purchase price. You are literally investing in your own home when you make a down payment on a house in California. And the more money you invest up front, the less you have to borrow from a bank or lender.

6. What if I can’t afford the down payment on a house in California?

Most FHA and conventional mortgage loan products require some kind of down payment. The VA and USDA loan programs are an exception to this rule, as they allow for 100% financing. But in a typical home-buying scenario in California, the buyer is required to make some kind of upfront investment.

But what if you can’t afford to put any money down on a home purchase in California? We’ve mentioned one “workaround” above. For most loan programs, home buyers are allowed to use gift money from a relative, a close friend, or another approved source. So that’s one strategy for borrowers who can’t afford to make a down payment.

There are also some grant programs available through federal and state housing agencies. But that’s a subject we will be covering in a future blog post.

Mortgage questions? Located in the Bay Area, Bridgepoint Funding serves borrowers across the state of California. We offer a broad range of financing options including conventional, FHA and VA loans. Please contact us if you have mortgage-related questions or would like to start the home loan application process. We look forward to helping you.

Mike Trejo

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

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