Minimum Down Payment for a Conventional Loan in California

Conventional mortgage loans are the most popular financing option among home buyers in California. In most cases, conventional loans require a down payment of at least 3%. That’s the minimum investment for most borrowing scenarios. But in some cases, borrowers have to put more money down.

This article explains the minimum down payment for a conventional mortgage loan in California, and other things home buyers should know about this financing strategy.

Minimum Down Payment for a Conventional Loan

A conventional loan is one that is not insured or guaranteed by the federal government. This sets them apart from government-backed mortgage programs like FHA and VA. So you might of think of it as a “regular” home loan, one that does not receive federal backing.

In California, most conventional mortgage loans require a minimum down payment of some kind. But the minimum required investment can vary depending on several factors, including the amount being borrowed.

In a typical borrowing scenario, the minimum down payment for a conventional loan is usually 3%. There’s a reason for that number, and it has to do with Fannie Mae and Freddie Mac. Those are the two government-sponsored corporations that buy home loans from lenders and sell them to investors.

Fannie and Freddie have requirements for the loans they’re able to purchase. Those requirements are generally passed down from the Federal Housing Finance Agency (FHFA), which oversees Freddie Mac and Fannie Mae.

One of those criteria has to do with the required investment. The minimum down payment for a conventional loan in California is usually set at 3%. That’s because Fannie and Freddie will acquire mortgage products with a loan-to-value (LTV) ratio up to 97% — but usually no higher than that. Conversely, this means the borrower has to put down at least 3% in order to qualify for such a loan.

That being said, there are some programs out there that offer conventional loans with an even smaller down payment. There are also some programs designed for first-time buyers that offer grant money to offset the down payment expense. But they’re the subject of another article.

Here, we are focusing on a regular or “standard” conventional mortgage loan in California. And for those, the minimum down payment is usually 3% for eligible borrowers.

Sometimes, a Bigger Investment Is Needed

In some scenarios, borrowers might have to make a bigger upfront investment. This is often the case with jumbo mortgages that exceed the conforming loan limit for the county where the home is located. Jumbo mortgages cannot be sold directly to Fannie Mae or Freddie Mac. As a result, they often come with stricter requirements for the borrower.

Due to their larger size and higher risk level, jumbo loans often require a bigger down payment as well. The required investment can vary due to a number of factors. But it’s usually more than the 3% minimum for conventional conforming mortgages, as described above.

A 20% Down Payment Is Not Always Required

You might be surprised to learn that the minimum down payment for a conventional loan in California can be as low as 3%. A lot of home buyers are surprised by that.

There is a widespread misconception that a borrower has to put down 20% to qualify for a mortgage loan. That might be true for certain jumbo mortgages. But for a “regular” conventional loan that falls within the conforming limits, a 20% down payment is not always needed.

A 2020 survey conducted by the National Association of Realtors® (NAR) found that the median down payment among first-time buyers in the U.S. was 7% of the purchase price. So much for that 20% myth.

To quote the NAR report:

The NAR survey also examined how home buyers paid for their new homes, revealing that 87% of buyers financed their purchases. This share is similar to that of previous years. In addition, the 12% median overall down payment was unchanged from 2019 – that number inched up from 6% to 7% for first-time buyers. The median down payment for repeat buyers was 16% in 2020.

Private Mortgage Insurance (PMI) Considerations

To recap, the minimum down payment for a conventional loan in California can be as low as 3% of the purchase price, for well-qualified borrowers. The private mortgage insurance (PMI) industry makes this possible. When a mortgage loan accounts for more than 80% of the home’s value, PMI is usually required.

So, if you make a down payment of less than 20% on a conventional loan, you might have to pay for PMI. This insurance cost gets rolled into your monthly payments, increasing their size.

Related: Why some borrowers put 20% down

The upside is that PMI allows home buyers to purchase a house sooner, without waiting years to save up for a 20% down payment. In a pricey real estate market like California, that can be a major benefit for borrowers.

Just know that if you make the absolute minimum down payment for a conventional mortgage loan, you could encounter the added cost of PMI. Though there are ways to avoid this extra expense.

Have questions? Located in the Bay Area, Bridgepoint Funding proudly serves the entire state of California. Our knowledgeable loan officers can help you explore your financing options, including the different down-payment strategies. Please contact us with any financing questions you might have!