California has long been one of the most expensive housing markets in the country, and it’s no wonder why. It’s the state with the highest population, and it’s growing. In fact, the state has added more than 2 million residents over the past decade, with the population climbing by more than 8% in that time.

Those people all need places to live, which is a key reason why housing prices and home values have continued to rise in California over the past several years. And even despite a dip due to the coronavirus pandemic, most observers expect 2021 to represent another year of growth in California’s housing market.

Regardless of a person’s job status or income, even in the best of circumstances, purchasing a home is a huge decision filled with tons of confusing terms. Whether it’s your first go-round or you’re looking for your next home, here’s what you need to know about the housing market and your mortgage options in California.

California First Time Home Buyer Options

Every family’s financial situation is unique, and many of us have experienced economic hardship in 2020 thanks to the pandemic. Still, certain terms never change, and homebuyers should be very familiar with a few key concepts.

Unless you’re fortunate enough to be able to pay cash for a house, you’ll need to get a loan. When it’s for the purchase of real estate, this is called a mortgage. These fall into two broad camps — conventional and government-backed. Not every person is eligible for both types of loans, so it may come down to getting what you can. But for those who cross over into both of these categories, it’s important to keep a few things in mind before looking for your California dream home:

Conventional loan

  • Not backed by a public agency
  • Usually carries lower interest rate
  • Typically requires a down payment that varies from at least 5% to as much as 20%
  • Requires good credit score, though this varies by lender; plan on having a score of at least 640

Government-backed loan

  • Technically will be issued by a private lender, but is guaranteed, insured or backed by a state or federal agency; the most common are the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA). Income and loan limits and other eligibility rules apply and vary by agency.
  • Lower down payment required, usually 3.5% for buyers with credit scores over 580, and 10% for others
  • Loan interest rate is typically higher than with conventional loans
  • Lower credit score requirement, though borrowers with scores below 580 will have to make larger down payment

Repayment options

The standard method for purchasing a home is getting a 30-year fixed mortgage. That means you repay the loan over three decades at an interest rate that doesn’t change. It’s estimated that about 9 in 10 homebuyers will opt for this type of loan. However, there are alternatives, and it’s important to do your math before deciding what’s best for you and your family.

ARM: An adjustable-rate mortgage in which the interest changes over time based on a certain marker or metric that’s established in the loan agreement, such as a certain amount of time having passed. This may be ideal for individuals who are certain they will not be living in the home beyond that time limit.

5/1 ARM: Using this type of 30-year mortgage, a buyer pays a fixed interest rate for the first five years of the mortgage and after that, the interest rate varies annually based on an index to which the rate is tied. Again, this type of loan is ideal for those who will move before the five years is up, as they won’t have to contend with an interest rate that might rise. Crucially, though, depending on the state of the economy, it’s also possible for the rate to fall, though this is not typical.

15-year: This is another fixed-rate mortgage, but it condenses the length of time until the loan is paid off. So a buyer would pay less in interest over the entire length of the loan, but their monthly mortgage payment would be considerably higher than with a traditional 30-year mortgage.

Other terms to know

Your down payment, principal and interest aren’t the only costs you need to keep in mind when you buy a home. Here are a few other related terms California homebuyers should know.

Mortgage insurance: In most traditional private loans, if a buyer makes a down payment of less than 20%, they will have to pay an additional monthly cost for mortgage insurance. This goes away when the value of the house exceeds the remaining loan amount by 20% or more, though you may need to make a special request to have it removed.

Equity: This term refers to the home’s value minus any remaining mortgage amount that’s still owed. When you sell your home, this figure is tied to how much profit you will get, which is why it’s generally considered good practice to put down at least 20% of the purchase price of your home. This amount also varies depending on the state of the housing market where you live, and while a home will generally increase in value over time, variations in the economy and housing market can actually cause a home to lose value.

Closing costs: These one-time fees are paid by both buyer and seller in order to transfer a property after the closing of an escrow period, which is usually around 30 days. These costs vary by location, and they are calculated using a percentage of the home’s value. Typically, a buyer will pay fees to their lender, real estate agent, title company and other fees, and in California, you can expect these fees to total between 2% and 5% of the sale price.

Housing Market in California

The largest U.S. state, California got even bigger over the past 10 years, adding the third-highest number of residents since 2010, according to estimates from the U.S. Census Bureau. All those people have to go somewhere, and that growth has kept the state’s housing market one of the nation’s hottest.

Top 10 states by numeric growth, 2010-2020

Texas 3,738,767
Florida 2,634,411
California 2,162,860
North Carolina 926,526
Georgia 904,836
Washington 870,397
Arizona 864,980
Colorado 709,665
South Carolina 512,402
Virginia 510,902

According to the most recent data from Zillow, California’s median home value late in 2020 was $608,632, the third-highest number in the country, behind only Hawaii and the District of Columbia. Additionally, despite the pandemic putting a cramp in many people’s budgets, California ranks in the top 10 for its increase in median home value between 2019 and 2020, meaning purchases have kept prices climbing.

Top 10 states by year-over-year increase in median home value, 2019-2020

Idaho 12.6%
Arizona 12.3%
Washington 11.4%
Utah 10.0%
Maine 9.7%
New Hampshire 9.0%
Rhode Island 8.4%
California 8.3%
Tennessee 8.1%
New Mexico 8.0%

Notably, six of the 10 states with the largest percentage increase in median home value over the past year are in the Western part of the U.S. In addition to home values rising, the market is growing increasingly competitive all across the state. Just a couple of years ago, the median number of days to a pending sale in San Diego was 32; this year, that’s closer to eight days. In fact, in all major California metro areas with available Zillow data, the median time to a pending sale has fallen dramatically.

Percentage change in median days to pending sale by metro area, 2018-2020

San Diego -75.0%
Riverside -71.9%
Sacramento -70.8%
Ventura -69.0%
Stockton -65.2%
Bakersfield -56.3%
Los Angeles-Long Beach-Anaheim -50.0%
Fresno -40.0%
San Jose -31.8%
San Francisco -27.8%

Rising home values in cities large and small all across the state are driving the state’s overall median home value higher and higher. Among cities and neighborhoods with available data, three of the six with the highest percentage increase in median home value over the past five years are in the greater Los Angeles metro area.

Top 25 California cities by percentage change in median home value, 2016-2020

Landers 81.5%
Ballico 76.4%
August 72.8%
West Hollywood 70.5%
South Pasadena 69.1%
San Marino 67.1%
Joshua Tree 65.4%
Kennedy 65.1%
Traver 63.5%
Garden Acres 63.3%
Calipatria 62.4%
Weldon 62.3%
Mojave 61.5%
Taft Mosswood 60.4%
Manhattan Beach 59.6%
Stratford 59.5%
El Nido 58.9%
Leggett 58.5%
Twentynine Palms 58.3%
Empire 55.8%
Stevinson 55.5%
Badger 55.2%
Rackerby 55.1%
California City 55.0%
Bass Lake 54.5%

Resources for California Homebuyers

Residents of California and those considering moving to the state may have several options for programs that can help them secure the financing necessary to purchase a home in this increasingly expensive market. In many cases, residency, income and other requirements may apply, so it’s important to do your due diligence before putting your homeownership eggs in one basket.

Down payment assistance: There are several programs in California to provide grants or low-cost loans to assist with down payments or closing costs. Check with your local city or county housing authorities, as these programs are administered on the local level. For example, the city of Brentwood has a down payment assistance program for first-time homebuyers; the city of Santa Ana has a similar program.

California Housing Finance Agency (CalHFA): This state government agency offers multiple types of mortgage and down payment assistance programs. No sales price limits apply, but borrowers must pursue this financing through their lender, as the agency does not provide funds directly. Interests rates on CalHFA-backed loans vary, as do borrower eligibility rules.

Federal Housing Administration (FHA): Federally backed mortgage loans administered by the FHA and offered through private lenders can help homeowners secure affordable housing, but the agency sets varying loan limits across the country. In California, these limits range from about $331,000 in non-metro areas like Glenn County to $765,000 in heavily populated counties like Los Angeles County. Be sure to check out the loan limit in the county where you’re considering purchasing a home before pursuing FHA-backed loans.

U.S. Department of Agriculture (USDA): The USDA Rural Development Single Family Housing Direct Loan Program sets eligibility limits for households based on their income. These limits help determine how much direct mortgage financing a family could receive via a direct USDA loan to purchase a home in a rural area or another eligible community. Here’s a look at the limits to be considered a low-income, four-person family in a selection of metro areas and counties in California:

  • Bakersfield: $55,900
  • Chico: $56,550
  • El Centro: $55,900
  • Fresno: $55,900
  • Hanford-Corcoran: $48,500
  • Los Angeles-Long Beach-Anaheim: $91,200
  • Madera: $55,900
  • Merced: $55,900
  • Modesto: $55,900
  • Napa: $87,700
  • Oxnard-Thousand Oaks-Ventura: $90,550
  • Redding: $55,900
  • Riverside-San Bernardino: $60,250
  • Sacramento: $69,050
  • Salinas: $77,500
  • San Diego: $94,950
  • San Francisco: $108,550
  • San Jose: $81,600
  • San Luis Obispo: $77,600
  • Santa Cruz-Watsonville: $117,450
  • Santa Maria-Santa Barbara: $108,400
  • Santa Rosa: $90,900
  • Stockton-Lodi: 60,000
  • Vallejo-Fairfield: $74,000
  • Visalia-Porterville: $55,900
  • Yuba City: $55,900
  • Alpine County: $69,100
  • Amador County: $62,950
  • Calaveras County: $64,300
  • Colusa County: $55,900
  • Del Norte County: $55,900
  • Glenn County: $55,900
  • Humboldt County: $55,900
  • Inyo County: $60,100
  • Lake County: $55,900
  • Lassen County: $56,550
  • Mariposa County: $55,900
  • Mendocino County: $55,900
  • Modoc County: $55,900
  • Mono County: $64,950
  • Nevada County: $68,800
  • Plumas County: $57,750
  • Sierra County: $64,400
  • Siskiyou County: $55,900
  • Tehama County: $55,900
  • Trinity County: $55,900
  • Tuolumne County: $56,700

VA: While veterans are able to secure loans through the VA of any amount, the department sets limits on the amount the agency will back. These limits vary by county and are based on the value and size of the home. For most single-family dwellings in California, the limit is $548,250, but that ranges up to $822,375 in large metro counties like L.A. County.

Conclusion

Purchasing a new home is an intense and exciting process. But it’s certainly not without its financial challenges, but fortunately for buyers in California, despite a housing market that moves rapidly, options for homebuyers, especially first-time homeowners, could make the process smoother.

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