What are my Mortgage options in California?

13 Jul 2020

Do you have any thoughts or planning to purchase a home in California? California is one of the most expensive places in the U.S to purchase property.  There may be various reasons to buy; renting out may be tiring and ready to buy a home in California, relocating to California. Or, maybe you already live here and have decided it’s time to move up to a bigger home. If you are thinking about buying a house in California, you are not alone. Indeed it’s a great place to live!   

Whether you are planning to buy a home or considering it, there’s a mortgage program that can meet your needs. Fortunately, however, Afinoz is a guide to help you. The article depicts everything where you can understand better to know about the types of home loans in California.      

For most people, the dream is to obtain their own home, which can be their most significant goal; and it motivates them to practice their business needs, financial goals and impacts personal lives. There are a numerous of benefits to owning a home which can provide a housing security for you and your family; the equity you have in your home is a form of savings account, instead of paying rent to someone else; there are also tax benefits; and, let’s admit it, there is a sense of pride in homeownership.If you haven’t owned a home for three years, you are considered a first-time homebuyer. Let’s cover everything you need to know.

Familiarize yourself with the various mortgage types available to homebuyers. Knowing your options can help guide you towards achieving an important life goal. You might wonder how it is possible to get a mortgage appropriately according to your needs, so here is a list of what you should know about California home loans!

Types of mortgages 

It is at most important to understand the common types of mortgages and how necessary it implies finding the right property? Various mortgages form in place, few of them are categorized as short term as 5 years or longest term of 40 years, but most common would be 15-year fixed and a 30-year fixed. The amount you pay for fewer years might increase your monthly payment but reduces the amount of interest you pay and vice versa. Lets understand in detail:

Popular California Loan Options

Fixed-rate Mortgages:

A fixed-rate mortgage known as FRM, charges a set rate of interest for the entire repayment term. Clearly it states, a mortgage loan where the rate of interest is fixed for the entire loan term with various repayment terms of 15, 20 or 30 years. Known as the “plain vanilla” mortgage, it offers the benefit of predictability; you will pay the same amount of principal and interest monthly. In a way it will benefit the borrower if the market rate goes up after the agreement is done. Making a note such as an increased number of payments will lead to paying off more interest in total.

The 30-year fixed-rate is the most common home loan type, and other ranges are available. Shorter terms, such as the 10-year and 15-year mortgages, offer less interest at higher monthly payments.Even with a fixed-rate loan, your monthly payments may fluctuate. The amount of principal and interest does not change, but taxes and insurance, which are not fixed, can affect the final total.Homeowners who plan to stay for many years tend to choose a fixed-rate mortgage. The main drawback is if they want to take advantage of falling interest rates, they will have to refinance their loan.

Adjustable Rate Mortgages :

 Adjustable-Rate Mortgage are popularly known as ARM. A borrower can choose from introductory rates for 3, 5, 7 or 10 years, which benefits an individual's interest rate adjusted yearly for the rest of the loan. This type of California home loan has a rate that can adjust or change over time. The mortgage rate can rise or fall with different market conditions

These days, most adjustable-rate mortgage loans are “hybrids.” They get this name because they start off with a fixed rate of interest for a certain period of time, after which the rate begins to adjust. You might wonder why someone would choose this type of California mortgage loan. Why would a homeowner want an interest rate that can change over time, and possibly go up? The reason is that there is a potential for savings in the short term. The initial rate on an ARM loan is usually lower than the rate assigned to a fixed home loan. So a borrower could potentially save money during the first few years of an ARM.

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 the 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 the down payment is < 20%

The most common strategy for ARMs,  Many borrowers who use adjustable-rate mortgages plan to either refinance or sell their homes before the initial fixed-rate phase has passed, avoiding the uncertainty of the adjustment phase. 

Simply, ARM loans generally start off with a lower rate than fixed-rate mortgages, but they have the uncertainty of adjustments later on. Fixed home loans are more stable and predictable over the long term, but might result in higher interest costs over time. So it really comes down to your priorities, and your long-term plans.

Conventional Mortgage:

A conventional home loan is a mortgage that is not insured, or guaranteed, by the federal government. They’re popular with borrowers who have good credit, a stable job and income, who can afford a down payment, and people who are financially stable overall. This is the most commonly used type and usually has the best rates. A borrower typically needs at least 10% for a down payment and good credit. Mortgage terms 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:

  1. 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 a higher FICO score.
  2. Down payment requirement is also higher on conventional loans. Borrowers are required to put a minimum of ten per cent (10%) down to purchase a house. Some borrowers are required to have a higher down payment depending on the individual borrower’s circumstances.
  3. 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 upfront. 

Borrowers who would rather not pay a monthly PMI can pay this fee upfront at closing. Homebuyers who put down less than 20% on a new home will pay private mortgage insurance (PMI). Consider putting down 20% to save money over the life of the loan. 

  1. Homebuyer Education counselling is required for one occupying the first-time homebuyer. Homebuyer Education is not required for non-first-time homebuyers.

Conforming and Non-Conforming:

Most conventional mortgages are conforming. Loans are considered conforming when they are equal to or less than the limit established by Freddie Mac and Fannie Mae and adhere to their criteria. Conforming loan limits matter because these enterprises buy mortgages from lenders to hold them in portfolios or package them into mortgage-backed securities (MBS) to be sold on the secondary market. By law, Freddie Mac and Fannie Mae are restricted to purchasing single-family mortgages with balances that fall within the limit because they are relatively risk-free.

Lenders use the cash from mortgage sales to raise capital and engage in further lending.

Currently, the conforming loan limit for one-unit properties in most of the U.S. is $484,350. The baseline conforming loan limit is adjusted yearly to reflect rising home prices. In high-cost areas, this limit for one-unit properties is adjusted to reflect higher median home values up to a maximum size limit of $726,525. For example, the limit for Fresno hits the baseline, while in San Francisco, that loan limit is maxed out.

Size is the main factor used to differentiate between conforming and non-conforming loans, but what if a borrower wants to finance a home above the conforming loan limit? In this case, a borrower will have to meet stringent requirements to acquire what is known as a jumbo loan. Jumbo loans are non-conforming loans because they exceed the conforming loan limits.  These are available in both fixed and adjustable rates and are a good option if you’re looking to buy a single-family or multi-unit home in a high market value area of California. Jumbo financing is needed when you require a loan higher than current conforming loan limits.

FHA Loan :

FHA Mortgage or FHA loan, insured by the Federal Housing Administration is government-backed where the down payment can be as little as 3.5% of the purchase price of the home. FHA loans are fixed-rate mortgages, with either 15- or 30-year terms. Buyers of FHA-approved loans are required to pay mortgage insurance either upfront or over the life of the loan which can be around 1% of the cost of the loan amount.

The FHA loan is considered the first-time homebuyer mortgage for several reasons. An FHA loan is a reasonable choice if you have limited funds. It requires a minimum down payment and relaxes credit score requirements. All FHA loans require borrowers to make the home their primary residence for at least one year and purchase mortgage insurance regardless of down payment. 

The upfront mortgage insurance premium (MIP) costs 1.75% of the loan amount and can be paid at closing or rolled into the loan balance. The annual mortgage insurance premium, which varies from 0.45% to 1.05%, is divided into monthly instalments and added to the monthly mortgage payments. They are paid throughout the life of the loan. However, with a 10% down payment at closing, the duration is reduced to 11 years.

VA Loan:

VA loan is known as Veterans loan which is offered to the military people serving in the United States. It is an excellent substitute to a conventional plan. VA loans require zero down payment and no mortgage insurance.Perhaps some borrowers do make a downpayment to reduce the cost of the loan and to pay a smaller VA loan funding fee. The fee begins at 2.15% of the loan amount. With a 5% down payment, the funding fee shrinks to 1.5%.

 To qualify for VA loan it has to be the primary residence with minimum property requirements.

  • You have served 90 consecutive days of active service during wartime.
  • You have served 181 days of active service during peacetime.
  • You have more than 6 years of service in the National Guard or Reserves.

General assistance:

  1. Eligible military veterans, active-duty personnel, and surviving spouses may be able to take advantage of no money down and no private mortgage insurance loans backed by the Veterans Administration. 
  2. 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.
  3. 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.
  4. 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 
  5. Homebuyer Education counselling is required for one occupying the first-time homebuyer.

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

Like the VA Loan, the USDA loan is government-insured. Backed by the United States Department of Agriculture, the loan program, also known as Section 502, was developed to improve the quality of life for homebuyers who earn low to moderate-income and are financing a home in a rural area. 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. Income and rural area eligibility varies by state and county, and all borrowers must use the property as their primary residence to qualify. Other things you should know about a California USDA Loan:

  1. 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.
  2. Credit score should be at least 640.
  3. The home must be a primary residence—it cannot be a second home, vacation home, or rental property.
  4. Homebuyer Education counselling is required for one occupying the first-time homebuyer.
  5. You must be a U.S. Citizen, U.S. non-citizen national, or Qualified Alien.
  6. You must have the legal capacity to incur the loan obligation.
  7. You must not have been suspended or debarred from participation in federal programs
  8. Demonstrate the willingness to meet credit obligations in a timely manner

       The USDA loan finances 100% of the home price, that is, the loan requires no down payment for eligible rural homebuyers and offers borrowers low-interest rates. There is a mandatory upfront mortgage insurance premium of 1.0%, typically financed into the loan, and an annual fee of 0.35% that is broken into monthly instalments. The annual fee is paid for the life of the loan.

Which Option Is Right for You?

According to the detailing, we can perceive a lot of mortgage options when choosing a home loan type in California. Buying a home can be a complicated process, especially for first-time homebuyers. It’s important to do your research, compare different options, and seek advice to help you get started. Understanding your options will help you feel empowered throughout each step. 

The best practice is to talk to several lenders about the mortgage types that are the most suitable for your financial situation. They will look at different factors, such as your debt-to-income ratio, credit score, and budget before making a recommendation. After all, buying a home is one of life's foremost milestones. 

Here is the good news for California homebuyers; is that you don’t have to do it alone. Afinoz can help you choose the best mortgage product or program for your needs. Don’t panic much about it! Our experts can help you to connect with various lenders, mortgage brokers, agents and get your work done quickly without any hassle. Furthermore, we monitor your financial needs and observe everyday rates, fluctuations in the market to provide the best rate with confidence, trustworthy. To get more updates and information, feel free to reach out to us.