How much money down do you need to purchase a Los Angeles home? That’s a loaded question and there isn’t a clear-cut answer. In his article, we’re going to shed some light on the all of the factors that make up the answer for you. Here we go!
The amount of funds needed to purchase a home will vary person to person and property to property on the basis of the cost of the home, type of loan selected and the financial and credit history of the prospective buyer. The 3 main upfront costs associated with buying a home include; the down payment, the closing cost fees, and cash reserves, plus the home buyers or (borrowers) credit history and debt to income ratio.
Typically the mortgage and loan industry considers 20% the standard down payment for a buyer with financial strength, however with new government and lender subsidized loans the percentage can be much less for qualified buyers. Popular options for buyers looking to put down a much lower down payment include a conventional loan with a 5 % down payment, and the FHA loan which can be as low as 3.5% of the home price. A smart rule of thumb is any down payment less than 20% usually we demand mortgage insurance – an additional insurance fee to protect the risk of defaulting on the loan.
FHA loans are for 1st-time buyers and require a minimum of 3.5% down payment. Most lenders can lend up to $417,000, with expectations in certain areas where the home value prices are substantially higher – like here in Los Angeles. FHA loans come with a PMI, which are additional payments that will be included with monthly payments and increase the total cost of spending each month (this is the mortgage insurance I was just telling you about).
Great news! Conventional loans are now available with as little as 5% down, this is a popular alternative as the PMI can be removed after accumulating 20% equity within the first 24 months on several loan options, however, you’ll need to verify that with your mortgage broker, loan officer, or direct lender.
Want to buy a home with no money out of your pocket? It is possible! There are 2 options that exist for 0% down financing: VA Loans for veterans and loans via the USDA in rural areas for farming and agriculture.
While acquiring funds for a down payment is usually the first thing a prospective buyer will think of in terms of the amount of liquid cash needed, there are also closing costs that will need to be paid in order to successfully close escrow. Typically homebuyers will pay 2-6 percent of the price of the home in closing fees- ouch! The percentage will vary, as some sellers will accrue some of the closing cost fees. Maximum amount allowable for seller paid closing costs vary by the type of loan:
203k – 6%
Conventional Mortgage -6%
If a Los Angeles home purchase price is $500,000 and your loan down payment percentage is 5% and the median closing cost percentage is 3.5 % of the home price, you will need a total of $25,000 for the down payment and $17,5000 for closing costs. The total amount of cash needed to close escrow for the home would about $42,500. Make sure you’re working with a trustworthy real estate agent who will help you negotiate with the seller’s to have them pay most if not all of your closing fees in the form of a sellers credit and/or price reduction at the close of escrow. Who you work with while buying your home makes a huge difference in your wallet.d5rswqWRDE
Cash reserves are the final upfront factor and are required by most lenders. Think about it. If you have just enough money to afford your down payment and closing fees what happens if the water heater needs to be replaced, or the roof starts leaking, or the plumbing needs updating? How will you afford home maintenance and pay the mortgage? Buyers who purchase a property in all cash will not fall into this category. Lenders require you have additional funds in reserves when closing on your mortgage, as they want to ensure you are not penniless and have the ability to successfully make mortgage payments. On average a lender will require 2-3 months of mortgage payments in savings prior to approving and closing on the mortgage.
If we were to revert back to the previous example of the 500K Los Angeles home and add 3 months of $2,500 mortgage payments the new upfront cost total is now $50,000!
$500,000 Home Cost =
$25,000( Down Payment) +$17,000 (Closing Costs) +$7,500 ( Cash Reserves) = $50,000 (Upfront cost)
To recap, the amount you’ll need to purchase a Los Angeles home is the total amount of your upfront costs which are based on the home price, the loan down payment percentage, closing costs and cash reserves. Prior to being pre-approved by a local Los Angeles lender an estimate of your costs would be 10-12% of the home price, however, you should not begin seriously looking for the property until you have a pre-approval letter from your lender. Reach out to a local Realtor you trust for a mortgage broker referral and help to identify the best new home for you without breaking the bank or overpaying.
Your Los Angeles Real Estate Expert
This article, How Much Money Down Do I need to Purchase a Los Angeles Home? was provided by Glenn Shelhamer of The Shelhamer Real Estate Group. If you are selling your Los Angeles home, I have a comprehensive marketing plan, including preparing your Los Angeles home properly that will help get your home sold in less time and for more money. Call me at 310-913-9477 or contact me to discuss how I will get your home sold.
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