It’s no surprise that the economy in 2017 is far from perfect. It’s even less of a surprise to Southern California residents that despite stagnant or even shrinking salaries, the cost of homeownership has risen dramatically. The Los Angeles Times reported that for the past four years, the Southern California median home price has risen. Each month the cost of homeownership slightly less attainable as prices climb. The current 2017 median price for a Southern California home is $530,000, according to the Times. For many first-time homebuyers, coming up with that pesky 20% down payment, or approximately $160,000, is no small feat.
Think about it this way. The cost of living in Southern California is generally higher than other areas in the United States, but most salaries are not, meaning money doesn’t generally go “as far.” Teachers in Southern California generally make a similar salary compared to those in other states. Yet the cost of living in one of the most popular Southern California towns, Los Angeles, is 43.7 percent higher than the national average, according to PayScale. The average salary? PayScale reports the average Los Angeles salary at $61,888. To become a homeowner in Southern California, many homebuyers have to save a massive amount of money on a standard salary and it becomes nearly impossible to do.
“If you know how big the down payment is, then why can’t you save enough?” Because it’s simply too much for anyone to save in a reasonable amount of time. Most mortgages require 20%, some 10%, but with these salary amounts and these housing prices, owning a home becomes a dream, a fantasy—anything but a reality.
But the traditional 20% and 10% mortgages are no longer the only way to finance a home. New programs and financing solutions have entered the market in an attempt to help first-time homebuyers purchase a home. These programs are the FHA loan program, the HomeReady program, and the VA loan program. If you qualify for one of these three programs, you can turn your dreams of owning a home into reality.
One of the most common first-time home buyer mortgage options for prospective homeowners is the Federal Housing Administration (FHA) Loan. The FHA Loan program is not unique to Southern California and is also available in other states; however, it is particularly valuable for those living in Southern California. An FHA Loan is insured by the United States government and has flexible credit requirements that can make it an ideal solution for those with less than stellar credit ratings. It also allows homebuyers to forgo the traditional 10% or 20% down payment in favor of a down payment as low as 3.5% in some cases.
The basic requirements for the FHA loan are a minimum credit score of 580 and a loan total that is less than $625,500. Most traditional lenders require a much higher credit score and a much lower loan total in order to lend. These more flexible underwriting guidelines make it possible for first-home buyers to finally own their own home.
Another flexible element of FHA loans is that it allows others to help the homeowner come up with their down payment. The down payment can come from the soon-to-be homeowner or can come from gifts from family members, local government programs, or even state grants. With FHA loans, the lender often pays for closing costs as well since the rates are a bit higher, which can save the borrower money.
The current annual premiums for FHA Loans vary from 0.7 percent to 1.3 percent depending on the down payment provided by the borrower and the length of the loan (15-year or 30-year). Another benefit for FHA loans is that there are no income limits, however, the FHA loans do have limits on the amount that can be borrowed varying by county with $625,500 being the highest allowable amount in Southern California counties (some counties such as San Bernardino and Riverside only go as high as $355,000).
It is important to speak with a knowledgeable lender who can help you find homes in your area that are a match for an FHA loan and who can help you create a complete application for FHA loan approval. FHA loans are not awarded to all eligible parties and so it is imperative that your lender is on your side.
Capstone Direct serves all of Southern California, including FHA loans with Ventura County options. We are located in Thousand Oaks and can provide a wide array of mortgage options.
Another option for Southern California first-time homebuyers is the HomeReady loan. This loan is financed through the Fannie Mae company. The mortgage program was created as a way to help Millennials, minorities, and mixed families trying to purchase their own home for the first time and striking out. The down payment is also allowed to come in the form of a gift, similar to the FHA loan program, and can also include any cash the borrower has on hand or any down payment assistance programs such as state grants or local government programs.
The HomeReady loan offers lower private mortgage insurance costs to make the monthly mortgage payment more affordable and allows income from non-occupant co-borrowers to qualify. This is a big win because parents of young Millennials or close friends or relatives can help a borrower qualify. The tricky part for the parent, friend, or other relative will be ensuring that the borrower can be trusted to pay on time. HomeReady also does not require a minimum amount from the borrower so 100% of the down payment could come in the form of a gift from other sources.
One of the more unusual aspects of the HomeReady loan program is the ability to use what they term “boarder income” in order to qualify. This means that if you would be able to have a roommate in the home, you can use this coming “boarder income” to qualify. This amount goes towards the overall income of the borrower. In Southern California, with the increased cost of living, most rental incomes can be significant and range anywhere from $600 to $2,000 for a roommate depending on the square footage and location of the home.
The one caveat for “boarder income” is that you must have documented payments of rent from a current roommate for the past year in order to qualify this income. This current roommate must also sign documents stating that they will move into the home with you and continue to pay rent. The exception to this rule would be if your unit were a basement unit or a mother-in-law unit that is separated from the home and more clearly defined. In this case you can find a renter for the unit to pay rental income and will not need the prior year of shared living and rental history.
The maximum debt-to-income ratio for the HomeReady loan program is 45%, which is also much higher than more traditional mortgage loan programs. For this program, the credit score does need to be higher than the FHA scores however. The HomeReady loan program allows credit scores as low as 620 to qualify, but the best rates are at the 680 credit score mark.
To learn more about the Fannie Mae HomeReady loan program, speak with an experienced loan officer from Capstone Direct. We have experience with this program and can help you take advantage of this program or steer you towards the other two first-time home buyer programs, the FHA loan program and the VA loan program.
VA loans are an excellent option for those who qualify. The VA loan has one primary requirement: you must be a US military veteran in order to qualify.
The VA loan is guaranteed in part by the U.S. Department of Veterans Affairs; however, this department does not create the actual loan. In order to participate in the VA loan program, you will need to work with an approved VA lender. At Capstone Direct, we do offer the VA loan to qualified veterans.
There are a number of reasons why you would consider a VA loan if you are eligible starting with the fact that you do not need a down payment in order to get a VA loan. That means veterans can get a mortgage for a new home without a down payment. An added bonus is that despite the fact that do not have a down payment, you will not have to deal with private mortgage insurance (PMI). This is something that many loan programs with little to no down payments must have, but that is not the case for the VA loan program. Instead, the veteran borrower has to pay a flat payment fee. This fee can be incorporated into the loan.
The VA loans also cater to individuals with poor credit. In most cases, 620 is the minimum score allowed, but some private lenders can help you get approved with a lower score. VA loans allow borrowers to refinance during the course of the loan as well, which keeps your options open as you move forward through life.
Owning a home is something that every American should have the chance to experience. When you own your home, you have a safe place to live, giving your family both security and stability. The goal of homeownership is a noble one, but even with these programs the road ahead will be difficult. A rock-solid strategy is necessary, and you should be prepared for a long journey towards mortgage approval.
Let a purchase expert from Capstone Direct help you. Our team knows what they are doing and have been helping applicants like you get their mortgage loan applications processed and approved, and ultimately close on a home.
Work with us today! Give us a call at (805) 229-6800. Our loan experts are standing by during local business hours. We have the knowledge it takes to turn your dream of Southern California homeownership into reality.