If you’re a first-time homebuyer in Southern California and you’re not sure where to start, you’ve come to the right place. In this article, I will be discussing down payments. A down payment is one of the three things that a lender considers when you apply for a home loan, along with credit and income.
What is a Down Payment?
In the most basic terms, a down payment refers to your own liquid money that you bring to the transaction when you buy a home. When you purchase a home, there are two parts to the purchase: your own money that you bring as a down payment and the loan that you borrow from a bank. For example, if you’re buying a home for $500,000 and you bring $50,000 of your own money as a down payment, the remaining $450,000 will be borrowed from a bank in the form of a home loan.
Requirements for Down Payments
The amount of your down payment will depend on the loan program you’re using and your particular situation. Here’s a breakdown of the requirements:
- If you’re a veteran with access to VA loans, you can buy with 0% down.
- First-time homebuyers can use a conventional 3% down payment or an FHA loan, which requires a 3.5% down payment.
- Repeat buyers who plan to live in the home they’re buying can qualify for a 5% to 10% conventional loan.
- Repeat buyers who are not planning to live in the home, such as investors, may need to make a 20% to 25% down payment or possibly higher depending on their situation.
Where Do Down Payments Come From?
Down payments can come from various sources, including:
- Checking or savings accounts: You can use your own liquid cash for the down payment.
- Retirement accounts: Some people choose to use funds from their 401k for their down payment.
- Gifts from family: If you’re buying with a co-borrower or a group, you can receive gifts from family members to help with the down payment.
- Home equity line of credit or cash-out refinance: Repeat buyers who don’t want to sell their current home may choose to use a home equity line of credit or cash-out refinance to access funds for their down payment.
Pros and Cons of Large Down Payments
Large down payments and small down payments each have their pros and cons. Let’s start with the benefits of a larger down payment:
- Avoid mortgage insurance: With a 20% down payment, you can avoid paying mortgage insurance.
- Lower monthly payment: A larger down payment means you’re borrowing less money, resulting in a lower monthly payment.
However, there are drawbacks to consider:
- Difficulty in saving: Saving 20% for a down payment, especially in Southern California where home prices are high, can be challenging.
- Delay in entering the market: Waiting to save a large down payment means potentially missing out on rising home prices.
Pros and Cons of Small Down Payments
On the other hand, small down payments also have their advantages and disadvantages:
- Opportunity to enter the market sooner: With a smaller down payment, you can get into the housing market sooner.
- Mortgage insurance and higher monthly payment: However, small down payments typically require mortgage insurance and result in higher monthly payments. Mortgage insurance can eventually be removed for conventional loans once the home has 20% equity.
Down Payment Assistance Programs
If you’re concerned about saving for a down payment, there are down payment assistance programs available in LA County and Southern California. To learn about $150,000 Down Payment Assistance being offering in April 2024 in California, watch below video
Frequently Asked Questions
Here are some frequently asked questions about down payments:
- Can I use a credit card for my down payment? No, your down payment must be liquid money from your own funds, such as checking or savings accounts, retirement accounts, or gifts from family.
- Do I need a larger down payment to have my offer accepted? No, a larger down payment does not guarantee that your offer will be accepted. Veterans and buyers using FHA loans with small or no down payments have had their offers accepted.
- Is the down payment on top of the purchase price? No, the down payment is part of the purchase price. It is the amount of your own money that you bring to the transaction.
Conclusion
Now that you have a better understanding of down payments, you can make informed decisions when it comes to buying a home in Southern California. Remember, the amount of your down payment will depend on the loan program you’re using and your specific situation. Consider the pros and cons of both large and small down payments, and explore down payment assistance programs if needed.
If you have any specific questions or want personalized advice, don’t hesitate to book a free consultation with me below 👇🏽👇🏽
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Watch “Credit Requirements For First Time Buyers in SoCal: here
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