Bay Area Mortgage Options With Less Than 20% Down

The San Francisco Bay Area is home to some of the most expensive real estate markets in the country. As a result, some home buyers have trouble coming up with a 20% down payment on a mortgage loan.

The good news, you don’t necessarily have to invest that much. There are ways to buy a home in the Bay Area with less than 20% down. In fact, some mortgage loans allow for a down-payment investment well below the 20% threshold — as low as 3% in some cases

Getting a Home Loan With Less Than 20% Down

Let’s start with the most important takeaway. It’s possible to qualify for a conventional loan in the Bay Area without putting 20% down. As long as you meet all of the other requirements for mortgage approval (including credit score, income, and debt level), you could qualify for a conventional mortgage loan with a smaller down payment.

As we’ve mentioned elsewhere on this blog, the government-supervised mortgage buyers Freddie Mac and Fannie Mae will purchase loans with a loan-to-value ratio (LTV) up to 97%. That means eligible borrowers can put down as little as 3% when using these conventional home loan options.

The difference between a 3% and 20% down payment is huge, especially in the Bay Area. As of December 2021, the median home value for the San Francisco-Oakland-Hayward metro area was around $1.3 million. Here’s how that amount would equate to a down payment, at 3% and 20%:

• 3% of $1.3 million = $39,000
• 20% of $1.3 million = $260,000

As you can see, there’s quite a gap between the minimum down payment for a conventional loan in the Bay Area, and the 20% level that some borrowers choose to invest.

Many home buyers can qualify for the 3% investment, while some might have to put more money down. For example, borrowers seeking a larger “jumbo” loan sometimes have to make a larger upfront investment. Our goal with this article is to make sure you’re aware of these different options.

Mortgage insurance ties into all of this, as well. So let’s shift gears and talk about that…

Expect to Pay Extra for Private Mortgage Insurance (PMI)

If you make a down payment below 20% on a conventional mortgage loan in the Bay Area, you might have to pay for private mortgage insurance, or PMI. These insurance policies are typically required whenever the loan-to-value (LTV) ratio exceeds 80%, which is typically what happens with a down payment less than 20%.

Granted, there are ways to avoid PMI, even when putting less than 20% down. One way to accomplish this is by combining two mortgage loans and paying the remainder out of your pocket, in the form of a down payment. The 80/10/10 financing strategy is a common example of this.

Benefits of Making a Larger Down Payment

The PMI requirement is one reason why some Bay Area home buyers put down 20% or more on a purchase. They do it to avoid the extra cost of mortgage insurance. But there are other advantages, as well.

Here are the benefits of making a 20% down payment in the Bay Area:

• Avoiding PMI. We covered this above. If you put at least 20% down when buying a home, you won’t have to pay for extra insurance on the loan. That’s a major advantage, especially when calculated over the long term.
• Lower rate. Making a larger investment might also help you qualify for a lower mortgage rate. Putting more money down reduces the level of risk associated with a home loan, for all parties involved. In some cases, this can result in a lower interest rate.
• Smaller payment. When you put more money down up front, you’ll end up with a smaller monthly mortgage payment. Sure, it requires a larger chunk of change on the front end. But it also means that you’ll have more disposable income at the monthly level, for years to come.
• Equity building. When you make a 20% payment, you’ll have significant equity (ownership) in the home from day one. The more money invested up front, the more equity you can gain.

Getting back to the question at hand: Can you get a conventional home loan in the Bay Area with less than 20% down?

In many cases, the answer is yes. There are several mortgage programs available these days that allow borrowers to make a smaller investment. You just have to weigh the pros and cons, as described above, and decide what’s right for you.

Let’s Explore Your Financing Options

As a Bay Area home buyer, you have different options to consider when it comes to your mortgage financing. We’ve only scratched the surface with this article. That’s why it’s so important to speak with a knowledgeable mortgage professional, and to explore your options.

Bridgepoint Funding is located in the Bay Area and offers a wide range of mortgage options. Please contact us if you have financing-related questions, or if you’d like to apply for a loan.