Pros and Cons: Putting 20% Down on a Bay Area Home Purchase

Why do so many home buyers choose to make a 20% down payment? What’s so special about this particular number? Should you put 20% down when buying a home in the Bay Area? What are the pros and cons associated with that level of investment?

These are common questions among Bay Area home buyers, and we’ll address all of them here today. Let’s start with the short version, before digging into the details.

Basic Mortgage Requirements for Bay Area Borrowers

When buying a home in the Bay Area, you don’t necessarily have to put 20% down. There are plenty of loan programs that offer smaller down payments, including the popular FHA program. Even conventional loans (that are not insured by the government) allow borrowers to put down as little as 3% in some cases.

Granted, there can be situations where a down payment of 20% or more is required for a Bay Area home purchase. This is sometimes true for the larger jumbo loans. But for most borrowers, that kind of investment is typically not necessary.

Here’s the minimum required investment for different financing options:

• Conventional loans: 3% – 5%, depending on the situation
• FHA-insured loans: 3.5%
• VA mortgage program: 0% in many cases

As you can see, there are ways to buy a home without putting 20% down. That’s good news for borrowers, especially with the high-priced nature of our regional real estate market.

But there are some clear advantages to putting 20% down on a Bay Area home purchase. So let’s move on to examine those potential benefits.

Benefits of Putting 20% Down on a Home Purchase

If you choose to go with a larger down payment, you could have an easier time qualifying for a mortgage loan. That’s because you are essentially reducing the lender’s risk. When you put 20% down on a house in the Bay Area — as opposed to, say, 3% or 5% — you’re also making yourself a stronger borrower.

You might also qualify for a lower interest rate if you put 20% down. Again, this ties back to the concept of risk reduction. Banks and mortgage lenders typically offer their best rates for borrowers who are considered to be less of a risk. Having more “skin in the game” makes you less risky, as a borrower.

Another benefit of putting 20% down on a Bay Area home purchase has to do with private mortgage insurance, or PMI. These insurance policies are typically required whenever a single loan accounts for more than 80% of the home’s value. Stated differently, PMI is generally required when a borrower makes a down payment less than 20% on a home loan.

PMI increases the amount of money you pay overtime. It also increases the size of your monthly payments. Should you decide to put 20% down a house in the Bay Area, you could avoid this extra expense altogether.

You’ll also end up with a smaller monthly payment, compared to if had you put less money down. A larger down payment reduces the amount you have to borrow from the lender, resulting in a smaller monthly payment. This allows you to put more of your monthly income toward savings, entertainment, travel, etc.

Lastly, you might have an easier time getting your purchase offer accepted if you put 20% down. Sellers tend to look favorably on buyers with the financial ability to make a larger down payment. This could give you an extra advantage in a highly competitive real estate market.

What’s the Best Option for You?

Should you put 20% down when buying a house in the Bay Area? That’s largely up to you. But there are some pretty big advantages of doing so, as we’ve just explained.

But let’s face it, the San Francisco Bay Area is a pretty expensive real estate market. Not every borrower or home buyer can afford to make a 20% down payment on a home purchase in this market. Fortunately, there are mortgage products and programs available for those people as well.