Down Payments and PMI: A California Mortgage Tutorial

If you want to buy a house in California but can’t come up with a 20% down payment, you still have some financing options available. But there’s a chance you’ll have to pay for private mortgage insurance, or PMI. This specialized insurance allows California home buyers to purchase a house sooner, and with less money down.

This tutorial explains the relationship between private mortgage insurance and down payments, while also addressing some common misconceptions among California home buyers.

In California, a 20% Down Payment Isn’t Always Necessary

A lot of first-time buyers think that they have to save up 20% or more for a down payment on a house. In fact, surveys conducted by Realtor.com have verified this misconception. The key word there is “misconception.”

The truth is that there are many mortgage programs for California home buyers that allow for down payments below 20%.

Here’s a quick snapshot of those options:

• FHA loans allow for a minimum down payment as low as 3.5% of the purchase price.
• Conventional (non-government) home loans allow for 5% down, or 3% in some cases.
• The VA program offers 100% financing, which eliminates the upfront investment.

In 2017, an increasing number of California home buyers are making down payments below 20%. According to data published recently by Freddie Mac, the average amount put down by first-time buyers in 2016 was 6%. The average among repeat buyers (who have owned houses in the past) was 14%. So clearly, a 20% down payment is not always required in California.

Of course, if you make a relatively low down payment when buying a house in California, you might have to pay private mortgage insurance or PMI.

How Private Mortgage Insurance (PMI) Works

PMI policies do offer some advantages to borrowers. This insurance allows borrowers in California to put less money down when buying a house. But it will result in a slight increase in the monthly payments. So it’s an important consideration you must understand before shopping for a loan.

Home buyers in California who make an upfront investment of less than 20% usually have to pay for private mortgage insurance. A PMI policy protects the lender against financial losses that would result if the borrower were unable to repay the loan. It’s just an industry requirement in cases where the loan-to-value (LTV) ratio rises above 80%.

Home buyers in California who can afford a larger down payment often choose to put down 20%, or more, in order to avoid private mortgage insurance. Of course, not all home buyers can afford to do that. First-time buyers in particular have a hard time coming up with a 20% down payment, especially in California’s expensive real estate market.

And that’s where PMI comes in. It puts homeownership within reach for a much larger pool of buyers, by allowing for a smaller down payment.

The average cost of a private mortgage insurance policy in California can vary based on several factors. According to research by Freddie Mac, borrowers can expect to pay “somewhere between $30 and $70 per month for every $100,000 borrowed.”

So we’re not talking about a huge increase in your monthly housing costs. And when you consider the fact that PMI allows you to buy a home much sooner, and with significantly less money down, you can see that the benefits outweigh the costs.

Getting Financial Assistance from Family, Friends, Etc.

We’ve covered the relationship between down payments and private mortgage insurance in California, and how it affects you as a home buyer. In closing, it’s worth mentioning that the upfront investment doesn’t necessarily have to come out of your own pocket.

Most mortgage programs today allow for down payment gifts from family members, close friends, or other approved donors. This is true for FHA and conventional home loans like.

The down payment gift is when a third party, like a family member or employer, provides you with funds to use for your upfront investment on a home purchase. The only stipulation is that the person providing the funds must also provide a letter stating they do not expect any form of repayment.

When you combine these gifts with some of the low-down-payment mortgage strategies mentioned above, you can see there are many options available to California home buyers.