How Should I Finance My Home Purchase?

Buying a Bay Area property is a big financial decision.  Unless you’re planning to pay for a home entirely in cash, you’ll need to finance the purchase through a combination of savings (down payment) and a loan (mortgage).  In this section, we’ll cover how much down payment you’ll need, and the various mortgage options.


How Much Do I Need for My Down Payment?


The minimum amount of funds required to purchase your property is dependent on your mortgage provider’s lending requirements.  Lenders set a minimum down payment percentage to ensure that borrowers have adequate “skin in the game” and that the bank can recover their loan amount should the borrower default of their mortgage.


In the Bay Area, mortgage lenders generally require a down payment of at least 20%.  So, for example, if you were looking at a property that would cost $2,000,000, you would need to have at least $400,000 in funds for your down payment.  Conversely, if you had $300,000 in savings, you would have enough for an adequate downpayment for a $1,500,000 property.


There are some exceptions to the 20% down payment threshold.  Some mortgage lenders may require buyers to make a down payment greater than 20% if the home being financed has unusual characteristics, is extremely expensive, or otherwise has features that make the home seem like riskier collateral for the mortgage lender.  They may also require that the borrower has additional reserve funds beyond the 20% down payment if the borrower is a first-time mortgagor, has an unusual or unpredictable income source (e.g., book royalties), or is otherwise a riskier borrower that could require some cushion to make the monthly mortgage repayments.


Conversely, certain specialized mortgage loans are designed to allow home buyers to purchase a home with a much lower down payment amount.  FHA loans, for example, and many loans available to veterans (such as VA loans, or loans available through the CalVet program here in California) have much lower down payment requirements, and in some cases may be available with zero down payment required. However, there are often strict eligibility requirements for these loans, and the amount available to be loaned to buyers through these types of loans is typically lower than available amounts under conventional loan products.

 

How Do I Get a Mortgage?


There are many different types of mortgage lenders out there, from banks to credit unions to online-only mortgage lenders.  There are also mortgage brokers, who can help connect you with multiple lenders and work as an intermediary. With so many mortgage providers, and with potentially different rates, amounts and terms being offered, it can be hard to know where to start to find the best mortgage.


A great starting point is your current primary bank or credit union.  Most banks offer special interest rates and terms for existing customers.  You can contact the mortgage department via your bank’s website, or you can pop into your local bank branch to speak to someone in person.  Your mortgage banker will be able to determine your maximum loan amount and your interest rate, factoring in any discount interest rates they may be offering.


You can also reach out to other banks and financial institutions to see what loan amounts and rates you qualify for.  Don’t be shy about reaching out - they’re eager for your business! First Republic, Citibank and Wells Fargo are popular banks for obtaining a mortgage in the Bay Area.


You can also work with a mortgage broker.  Mortgage brokers have relationships with multiple banks and credit unions, and will be able obtain rates and terms from the various institutions.  Another benefit of working with a mortgage broker is you only have to submit your information once, and the mortgage broker does the leg work of submitting your information to the various lenders.


Whether you start with your existing bank or a mortgage broker, it’s important to shop around to ensure you’re finding a mortgage that’s right for you at a competitive rate.  There are a number of resources online that regularly search available mortgage options and rates - we think the tips and comparison tools at Bankrate and NerdWallet are particularly helpful.  We find that most Bay Area buyers will explore 3-5 potential mortgage options before choosing the one with most competitive rate and terms.


In order to qualify you for a mortgage, a lender will evaluate your credit and financial circumstances.  Expect to be asked to provide potential lenders with two years of tax returns, pay stubs, employer information and work history, information about your savings and any other assets you may own or debts you may have outstanding.  Once you’ve provided all the requested information, a lender will run through its internal processes to determine whether it’s able to offer you a mortgage, and if so, on what terms. This can take up to several weeks, so it’s a good idea to begin this process early in your home search.    


If a lender is able to offer you a mortgage, they’ll provide you with a pre-approval letter, which you’ll include in the offer materials you submit on homes you choose to bid on.  Once your bid is accepted, you’ll need to quickly complete the formal loan application process, then work together with your lender to coordinate an appraisal of the home and ensure the loan is approved, processed and funded in time for closing.  See “Finalizing Your Mortgage”, here.

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