How Home Loans Work in California

If you’ve thought about buying a house in the Golden State, you’re not alone. It’s a great place to live! You might wonder how to get a mortgage in California, so we’ve put together a list of what you should know about California home loans.

Conventional Mortgage

This is the most commonly used type and usually has the best rates. You’ll typically need at least 10% for a down payment and good credit. Mortgage term can be 15 or 30 years or interest only where you are not paying any principal in your payment.

For a conventional loan mortgage in California:

  • A middle FICO score of at least 620 is a rule that most lenders require at a minimum to qualify for a conventional loan. Most bigger lenders would require higher FICO score.
  • Down payment requirement is also higher on conventional loans. Borrowers are required to put at least five percent (5%) down to purchase a house. Some borrowers are required to have a higher down payment depending on the individual borrower’s circumstances.
  • Mortgage Insurance on conventional loans is called Private Mortgage Insurance (PMI). It is unique to the borrower’s situation starting with credit score, income, total monthly obligation, property location, among other things. This can be either included in their monthly payment or paid up front. Borrowers who would rather not pay a monthly PMI can pay this fee up front at closing.
  • Homebuyer Education counseling is required for one occupying first-time homebuyer. Homebuyer Education is not required for non-first-time homebuyers.

FHA Mortgage in California

This is a first time home loan program that’s actually available to anyone. The down payment is only 3.5% and is more forgiving of lower credit scores. The interest rates are not as attractive as conventional but qualifying for the loan isn’t as tough either.

CalHFA (California Housing Finance Agency)

CalHFA does not accept applications directly. A CalHFA approved lender must be used to qualify you for a home loan. It offers down payment and closing cost assistance available for low- to moderate-income borrowers. Requires homebuyer education and counseling for first-time homebuyers using a CalHFA program online for a fee of $99, or in person through NeighborWorks America or any HUD-Approved Housing Counseling Agency.

To qualify for a California FHA loan, you must meet certain eligibility requirements, including:

  • Acceptable credit rating: at least a 580 (660 for manufactured homes) FICO score
  • Have a minimum 3.5% down payment which can be provided as a gift from a friend or family member
  • The ability to repay the mortgage as set forth by HUD guidelines
  • The sales price of the home cannot exceed CalHFA’s sales price limits established for the county
  • Homebuyer Education counseling is required for one occupying first-time homebuyer. Homebuyer Education is not required for non-first-time homebuyer.
  • The debt-to-income requirement allows you to have a higher ratio compared to other loan programs. FHA will go as high as 55% DTI; no other loan program in the market subscribes to this rule but FHA.

California VA Loan

This is a zero down payment loan, but you must be a veteran. The VA Mortgage program is made available to qualified and eligible California Veterans through private lenders such as banks, mortgage brokers, and direct lenders.

  • The first step in getting a California Vet or VA Mortgage is to get pre-qualified for a home purchase or refinance using your Veterans Affairs benefit. An approved lender will tell you what price home you are pre-qualified for and issue you a Veteran Mortgage pre-approval letter.
  • A VA Certificate of Eligibility is required to determine if you have eligibility for the VA Home Loan benefit. A California VA Home Loan Specialist can get this easily—and much more quickly than you can do yourself—directly from the VA. All that’s needed is a copy of your DD214 (if you don’t have this, you can get a copy easily from the VA eBenefits website).
  • Homebuyer Education counseling is required for one occupying first-time homebuyer.
  • Once you have been pre-qualified you for a California Vet or VA Mortgage, the next step is to find a house to buy, unless you’re refinancing. Let your realtor know up front you’ve been pre-qualified and that Veteran mortgages allow for seller paid closing costs up to 4% so they can incorporate it in to the home purchase contract.
  • The VA Lender contacts the VA who sends out a VA appraiser/inspector. The VA appraiser does a more thorough inspection of the property than with conventional financing.
  • Once you have found a home to buy, you’ll need to complete the formal application. Your chosen lender will guide you through the required steps and paperwork.

USDA Rural Housing Loan

This type of home loan can only be used in specific areas, towns, and approved properties, but the definition of rural may be more flexible than you think. Other things you should know about a California USDA Loan:

  • You must meet the income eligibility. The household limits vary according to how many occupants in the home and what county the property is located in.
  • Credit score should be at least 640.
  • The home must be primary residence—it cannot be a second home, vacation home, or rental property.
  • Homebuyer Education counseling is required for one occupying first-time homebuyer.
  • You must be a U.S. Citizen, U.S. non-citizen national, or Qualified Alien.
  • You must have the legal capacity to incur the loan obligation.
  • You must not have been suspended or debarred from participation in federal programs
  • Demonstrate the willingness to meet credit obligations in a timely manner

Adjustable Rate Mortgage (ARM)

ARM rates that start out lower than the current rates, but can change after one, two, or five years.

5/1 ARM

This type of loan is best for those who will sell before 5 years or are comfortable with payments that can change over time.

  • Fixed rate for 5 years, then may change every year thereafter
  • Lower interest rate for a set period of time
  • PMI typically required if down payment is < 20%

7/1 ARM

This type of loan is best for those who will sell before 7 years or are comfortable with payments that can change over time.

  • Fixed rate for 7 years, then may change every year thereafter
  • Lower interest rate for a set period of time
  • PMI typically required if down payment is < 20%

Golden State Mortgage Can Help

At Golden State Mortgage, we are a California-based mortgage company that can help you through every step of financing your new home. Fill out the quick contact form or call Golden State Mortgage today at 1-888-502-2136 to speak with one of our California mortgage specialists and get a free good faith estimate.

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