California First Time Home Buyer Guide

First time home buyers in California have significant opportunities and challenges as well. 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 2024 to represent year of rebounding growth in California’s housing market.

Irrespective of an individual’s employment status or income, buying a home is a significant decision filled with a plethora of bewildering terms. Whether you’re a first-time homebuyer or on the hunt for your next residence, here’s what you should be aware of regarding the housing market and your mortgage choices in California.

California First-Time Homebuyer Options

Each family’s financial situation is distinctive, and many have encountered economic challenges in 2023 due to inflation. Nevertheless, some fundamental principles remain constant, and prospective homebuyers should be well-acquainted with crucial concepts.

Unless you have the privilege of making a cash payment for a house, you’ll need to secure a loan. When it comes to real estate purchases, this financial instrument is known as a mortgage.

These home mortgages are broadly categorized as conventional or government-backed. Not everyone is eligible for both types of loans, so the available options might be determined by your circumstances.

However, for individuals who meet the criteria for both these categories, there are some key considerations to bear in mind before embarking on the quest for your ideal California home:

Conventional loan

• Not secured by a governmental entity
• Typically offers reduced interest rates
• Involves a down payment that can range from a minimum of 5% to as high as 20%
• Mandates a satisfactory credit score, though the specific threshold may vary by the lender, aiming for a minimum of 640

Government-backed loan

• Formally originated by a private lender but guaranteed, insured, or supported by a federal or state agency; the most common entities include the Federal Housing
• Administration (FHA), U.S. Department of Veterans Affairs (VA), or U.S. Department of Agriculture (USDA).
• First time home loans for bad credit
• Various eligibility criteria, such as income limits and loan boundaries, are determined by each agency.
• Requires a reduced down payment, often 3.5% for individuals with credit scores exceeding 580 and 10% for those with lower scores
• Typically results in a higher interest rate compared to conventional loans
• Imposes a more lenient credit score prerequisite, although applicants with scores below 580 must provide a larger down payment (see FHA credit score requirements)
• In 2023 FHA-loan limits increased

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. Compare 30-year and 15-year mortgage rates.

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. Compare 3 and 5-year ARM rate loans.

15-year Mortgage: This represents another fixed-rate mortgage option, but it shortens the time it takes to fully repay the loan. While a buyer would pay less in interest over the entire loan duration, their monthly mortgage payment would be substantially higher compared to a conventional 30-year mortgage.

Additional Key Terms

When purchasing a home in California, it’s essential to consider that your down payment and monthly principal and interest payments are not the only financial aspects to take into account. Here are some other pertinent terms that California homebuyers should be familiar with:

Mortgage Insurance: In most conventional private loans, if a buyer’s down payment is less than 20% of the home’s purchase price, they are typically required to make an additional monthly payment for mortgage insurance. This cost ceases when the property’s value surpasses the remaining loan amount by 20% or more. However, requesting its removal may be necessary.

Equity: This term denotes the value of the home minus the outstanding mortgage balance. When selling your home, this figure is directly linked to the profit you’ll receive. Therefore, it is generally advisable to make a down payment of at least 20% of the home’s purchase price. The specific amount may vary based on the local housing market conditions. While homes generally appreciate in value over time, fluctuations in the economy and housing market can lead to depreciation.

Closing Costs: These are one-time charges paid by both the buyer and seller to facilitate the property’s transfer following the closure of an escrow period, typically lasting around 30 days. The precise amount of these expenses is contingent on the property’s location and is calculated as a percentage of the home’s value. Generally, the buyer is responsible for fees to their lender, real estate agent, title company, and other related expenses. In California, these fees generally amount to approximately 2% to 5% of the property’s 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

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

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

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

Resources for California Homebuyers

Individuals residing in California and potential future residents may encounter various programs aimed at assisting them in obtaining the funds required to buy a home in this progressively costly real estate market. Often, specific criteria such as residency, income, and additional requirements must be met, underscoring the importance of conducting thorough research before committing to any particular homeownership solution.

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 defines eligibility thresholds for households based on their income. These thresholds play a crucial role in determining the amount of direct mortgage financing that a family might be eligible to receive through the program, a USDA loan to purchase a house in a rural area or another eligible community. Let’s examine the criteria for classifying a four-person family as low-income in various metropolitan areas and counties throughout 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.

California Home Buyer News

Is the Latest Home Buying Grant Increasing Diversity?  – Sacramento Bee

State of California Warns San Francisco They Could Lose Funding if Housing Goals Are Not Met  – ABC News

New Law Requires More Affordable Housing in California – KPBS

Remember When Buying Your First Home in California

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.

References

• California Association of Realtors, 2021 Market Forecast. (2020).
• U.S. Department of Agriculture, Rural Development Single Family Housing Direct Loan Program, Adjusted Income Limits. (2020).

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