The Pros and Cons of Low Down Payments in California

When it comes to the down payment in California, buyers always want to know how low they can go.

The industry standard is that down payments will be 20% of the property’s purchase price. This percentage is important because it determines if a buyer will need to have private mortgage insurance (PMI) with their loan.

PMI is required when a buyer in California uses a mortgage loan that comprises more than 80% of the property value. The ratio of the loan amount and the property value is known as the Loan-to-Value Ratio (LTV). When a buyer’s LTV is above 80%, they are typically required to have PMI. Once their LTV decreases, they can stop making PMI payments.

How much is PMI in California?

The cost of PMI policies can vary. We usually see annual premiums ranging from 0.3% to 1.5% of the original loan amount in California.

So, why would a buyer put less than 20% down when making their down payment?

Pros of A Low Down Payment in California

Sometimes, buyers simply do not have 20% of the purchase price for their down payment. Having a low down payment in California can allow buyers with limited funds to move forward with their purchase sooner than if they had to wait and save up the cash.

Cons to A Low Down Payment in California

The obvious con to having a low down payment in California is that buyers must pay for PMI until their LTV decreases. While they can usually move forward with their purchase sooner than if they had to wait to accumulate funds, they’ll have an extra expense to pay when the loan closes.

How Low Can You Go?

Different loan programs have different restrictions and requirements when it comes to down payments. Below is JVM’s breakdown of loan types and how low of a down payment is allowed. (For additional information on loan types and down payment requirements, you can always refer to our Loan Types page.)

Conforming/ Conventional: The minimum down payment for a primary residence is usually 5%, but eligible first-time homebuyers can put as little as 3% down. Monthly PMI is required when LTV ratios are over 80%. Down payments may be entirely gifted funds for primary residences and second homes.

Federal Housing Administration (FHA): The minimum down payment for an FHA loan is 3.5% of the purchase price for all property types. Both an up-front mortgage insurance premium and a monthly mortgage insurance payment are always required. The up-front mortgage insurance premium is typically financed into the loan amount. The down payment can be sourced entirely from gift funds.

Veterans Administration (VA): VA mortgages are guaranteed by the VA with very flexible underwriting and down payment guidelines for veterans and their spouses only. There is no down payment requirement for VA loans and no monthly mortgage insurance. VA loans can only be used for primary residence purchases.

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