California Conventional Loan Down-Payment Requirements in 2020

August 17, 2020 | By Brandon Cornett | © 2020, QualifiedMortgage.org

This article explains the down payment requirements for conventional loans in California. A “conventional” mortgage loan is one that’s not insured or backed by the government.

Borrowers who use a conventional loan to buy a home in California can put down as little as 3%, depending on the circumstances. Let’s take a closer look at these requirements.

What Is a Conventional Loan?

In simple terms, a conventional loan is one that’s not part of a specific government program. The term “conventional” is used to differentiate these mortgage products from other government-backed loan programs, like FHA and VA.

Government-backed programs like FHA and VA give the lender an added layer of protection, in the form of government insurance.

In contrast, a California conventional home loan represents a higher risk to the lender. So their requirements for down payments, credit scores and other eligibility criteria can be higher as well.

Down Payment Requirements in California

Down payment illustration

As mentioned above, the down payment requirements for a conventional loan in California can vary from one lender to the next. Additionally, larger mortgage amounts (such as the so-called jumbo loan) sometimes have higher down payment requirements than their smaller.

Many lenders will allow for a down payment as low as 3% of the purchase price, for a conventional loan. That’s because Freddie Mac and Fannie Mae — corporations that buy loans from lenders — will purchase loans with an LTV ratio up to 97%. Lenders can offer mortgages with a down payment as low as 3% and still sell them to Fannie Mae and Freddie Mac, via the secondary market.

So that’s the closest we can get to a “standard” down payment requirement for California conventional loans. Generally speaking, borrowers can put down as little as 3% on these mortgage products, as long as they meet all other mortgage-related requirements.

Special Programs for First-Time Buyers

There are a number of programs in California designed for first-time home buyers with limited funds for a down payment.

Some of these programs offer grants to help eligible home buyers cover their down payment and/or closing costs. Other programs offer a deferred-payment loan to help the buyer cover these costs. Details and requirements vary.

You can find a list of these programs online with a quick Google search. Just look for “first-time home buyer programs” followed by your county and state.

Using Gift Money from a Third Party

We’ve covered some of the basic requirements for down payments on conventional loans in California. Now for a bit of good news. Most mortgage programs available today allow borrowers to use gift money to cover their down payment expense.

In this context, a “gift” is money donated by a third party and put toward a home buyer’s down payment or closing costs. There are specific requirements for gift money. For one thing, the money must truly be a gift or donation. The person giving you the money cannot expect you to pay it back.

Conventional loan programs in California usually require a third-party donor to submit a signed letter stating that they do not expect any form of repayment.

Down payment gifts are a popular strategy among home buyers who use conventional loans in California. When it comes to home prices, California is one of the most expensive states in the country. This is especially true for the Bay Area and the coastal housing markets of Southern California.

Because of our relatively high home prices, some buyers have a hard time meeting the minimum down payment requirements for a conventional loan in California. And this is where gift money can come in handy.

How Mortgage Insurance Ties into This

Borrowers who make smaller down payments usually have to pay for private mortgage insurance, or PMI. This is a unique kind of insurance that protects the lender but is paid for by the borrower.

Generally speaking, mortgage insurance is required in California when a single home loan accounts for more than 80% of the property value.

PMI is not terribly expensive. According to research by Freddie Mac, borrowers in California can expect to pay “somewhere between $30 and $70 per month for every $100,000 borrowed” for a standard private mortgage insurance policy.

That’s not a huge sum. But it is an extra cost you should be aware of.

Of course, there’s an upside to this as well. PMI essentially allows home buyers to purchase a home sooner and with less money down. Without PMI, most home buyers in California would likely be required to make larger down payments. So there are pros and cons to mortgage insurance.

According to a recent report by U.S. Mortgage Insurers (USMI):

“USMI also found that the top five states for low down payment home financing with private MI were Texas, California, Florida, Illinois, and Ohio.”

The takeaway here is that mortgage insurance ties into the down payment requirements for a conventional loan in California. If you put less than 20% down when buying a home, you could incur the additional cost of PMI.

Acceptable Sources For down Payment Funds

Different mortgage programs have different requirements when it comes to “acceptable sources” of down payment funds. For a California conventional loan, you can use money from almost any legitimate source.

Related: What are sourced and seasoned funds?

Commonly accepted down payment sources include checking accounts, savings, stocks or bonds, IRAs, 401(k), trust accounts, etc.

Disclaimer: This article covers some of the basic down payment requirements for conventional mortgage loans in California. Home loan criteria can vary from one lender to the next, and also from one mortgage program to the next. As a result, portions of this article might not apply to your particular situation.