California Home Loan Q&A for 2011

2011 California Mortgage GuideWill you be shopping for a home loan in California this year? If so, you’ll find this list of frequently asked questions helpful.

Home buyers in California this year will need to do plenty of research. This goes double for first-time buyers. A lot has changed with California home loans and lenders over the last few years. The subprime mortgage industry has disappeared. Lending criteria have tightened. And the number of financing options has decreased.

But that doesn’t mean you can’t qualify for a California mortgage loan in 2011. On the contrary, a well-qualified borrower can easily get approved for a home loan in California. But therein lies the question. What is a “well-qualified borrower” by 2011 standards? This is just one of the questions we will answer in our California home loan Q&A series.

Home Loan Questions from People Like You

To come up with these mortgage FAQs, we accepted questions from California residents over a 30-day period. We also conducted several online surveys on the Home Buying Institute website. From all of these questions and responses, we made a list of the most frequently asked questions. So without further ado, let’s talk about what it takes to get a California home loan in 2011.

How Do I Qualify For a California Mortgage in 2011?

By far, this is the number-one question on the minds of most home buyers. Even people who have bought a home before are uncertain about the current qualification guidelines. I’ll cover some of those guidelines in just a moment.

But first, a quick disclaimer: Nothing I am about to tell you is written in stone. When you apply for a California home loan, the lender will look at the big picture in addition to the individual pieces. If you measure up well in four out of five areas, they might make exceptions for the fifth area. For example, if you have excellent credit and a good down payment, the lender might be more flexible with their debt-to-income ratios.

With that disclaimer out of the way, let’s talk about what it takes to qualify for a California home loan in 2011.

Credit Score Requirements

The first thing you need is a good credit score. The definition of “good credit” has shifted upward over the last few years. What was considered a qualifying credit score during the housing boom won’t even get your foot in the door today. Here again, there are exceptions to every rule. But you’ll probably need a credit score of at least 620 to be approved for a home loan in California.

The same goes for FHA loans. When you apply for an FHA home loan in California, you must apply through a mortgage lender in the private sector. The federal government insures the loan, but they don’t actually make the loan. In many cases, there are discrepancies between the FHA’s minimum standards and those used by FHA-approved mortgage lenders. Credit scores are a good example of this.

According to the FHA’s guidelines, you could qualify with a credit score as low as 500. In order to qualify for the 3.5 percent down-payment program, you would need a credit score of 580 or higher. Here’s where the confusion begins. Most California mortgage lenders will turn you away if you have a credit score less than 620. Two of the largest lenders in the country, Wells Fargo and Bank of America, recently announced that they were increasing credit-score requirements on some FHA loans.

Bottom line: If you want to qualify for a California home loan in 2011, you’re going to need a good credit score by current standards. While the definition of “good” varies from one lender to another, most are requiring scores in the 620 – 640 range.

Debt-to-Income Requirements

You’ll also need a manageable level of debt. California mortgage lenders will review your gross monthly income in relation to the amount of debt you have. If your debt payments (for credit cards, student loans, retail accounts, etc.) are consuming too much of your monthly income, you will have trouble qualifying for a California home loan. This is another area where there is some variance. Some lenders adhere to very strict guidelines for debt-to-income ratios. Other lenders have more flexible guidelines that take the bigger picture into account.

The general rule for debt ratios is “28/36.” This means your housing-related debt (i.e., mortgage payment) should not exceed 28 percent of your gross monthly income. And your total debt should not account for more than 36 percent of your monthly income. FHA debt-to-income ratios are a bit more relaxed.

We’ve covered some of the most important criteria when applying for a California home loan. We talked about your credit score, your income and your debt levels. The size of your down payment will also determine whether or not you get approved for a particular loan program. And that leads us to the next frequently asked question in our series…

How Much of a Down Payment Will I Need?

This will depend on the type of loan you are using. If you qualify for a VA or USDA loan, you might not have put anything down. But those loans are only available to certain people. If you use an FHA loan (which is a popular option these days), your down payment could be as low as 3.5 percent. For a conventional mortgage loan in California, the lender will probably require at least 10 percent down.

Lenders today want home buyers to have more skin in the game. This was one of the big problems during the housing crash. A lot of mortgages were given out to people who put little or nothing down, and that meant the lenders carried most of the risk. When all of those California home loans started to go belly up, the mortgage lenders took devastating losses. But I don’t need to recount all of this history for you — you’ve seen it in the news countless times. As a result of all this, some of the strategies that were used to minimize down payments in the past are no longer available. And that brings us to the next frequently asked question in the California home loan series…

Are 80-10-10 Piggyback Loans Still Available in California?

Elsewhere in the country, yes. In California, probably not.

I would again remind you that there are exceptions to every rule. But based on everything I’ve read lately (and my discussions with lenders), 80-10-10 piggyback loans are rare in California these days.

For those of you who are not familiar with this term, here’s a quick definition. A piggyback loan strategy is when you use two mortgage loans to buy a house. In the case of the 80-10-10 strategy, you would get a first mortgage for 80 percent of the purchase price. Then you would get a second mortgage for 10 percent of the purchase price (the second loan “piggybacks” on the first). The remaining 10 percent would be paid by you, the home buyer, in the form of a down payment. This is basically a way to avoid paying private mortgage insurance on the loan, because none of the loans would account for more than 80 percent of the property value.

This type of California home loan was extremely popular during the housing boom. But like a lot of the other creative financing strategies in use back then, you don’t see much of them around today. When shopping for a mortgage in 2011, you probably won’t find a lender willing to offer this option. But if you can come up with a 10-percent down payment, then you can probably qualify for the traditional 90/10 mortgage loan. This is where the lender gives you 90 percent of the purchase price, and you make up the difference with your 10-percent down payment. Of course, you’ll have to pay for private mortgage insurance if you go this route.

Are There Home Loans for People with Bad Credit?

This is going to be a short answer. People with bad credit won’t qualify for a California home loan in 2011. It’s going to be a long time before lenders start giving out subprime mortgages again. Giving mortgages to people with bad credit and low income is what wrecked the housing market in the first place. If you currently have bad credit, you should focus on improving your credit score (here’s how). If you can get your score into the mid-600 range or higher, you’ll have a much easier time qualifying for a California mortgage loan.

When Does It Make Sense to Buy A House?

Do you even need to buy a house? This is the first question you should ask. A few years back, some folks in the housing industry came up with the notion that homeownership was the “American dream.” This is silly. The American dream is whatever you want it to be. Some people can live their dreams without ever owning a house. I know plenty of lifetime renters who are perfectly happy to stay that way. You need to make sure that buying a house improves your quality of life, instead of taking away from it. Buying before you’re ready can lead to heartache — financially and emotionally.

Next, you need to evaluate your financial situation to see if you could realistically qualify for a mortgage loan. It’s tough to get a California home loan in 2011. Lenders are looking for higher credit scores, lower debt levels, steadier income, and larger down payments. If you can measure up in all of these categories, then it might be a good time to buy. If you fall short of the minimum requirements, you’re probably not ready to buy.

Lastly, you need to consider the real estate market where you live. California is a big state with a lot of housing diversity. Some markets are predicted to rebound in 2011, while others are predicted to decline even further. Generally speaking, it’s a bad idea to buy a house in a market where the home prices are still declining. If you do that, you could find yourself in a negative-equity situation soon after buying.

Many are predicting that home prices in California will continue to decline through 2011. I would agree with this, for the most part. I think there are some cities that will see home-price increases in 2011. But I think most of California will experience flat or declining home values over the next year. Home sales in California increased 15 percent last month, over the month prior, and that’s a positive sign.

The bottom line is you need to understand what’s going on in your local real estate market. Before you apply for a California home loan, you need to be confident that a home is a good investment. This will require some extensive reading and research on your part. There’s no way around this. But when you consider the size of your investment, it’s easy to justify homework.

Do I Need to Get Pre-qualified Or Pre-approved for a Loan?

I recommend that you get pre-approved for a mortgage before shopping for a house. In most cases, getting pre-qualified is a waste of time. The difference between these two things has to do with the amount of scrutiny on the lender’s part. For a pre-qualification, the lender doesn’t look at much of your financial background. They might only look at your income and then tell you how much of a loan you could get. But when you consider how tough it is to get a California home loan these days, you can see why this kind of narrow assessment wouldn’t be very helpful.

A pre-approval, on the other hand, goes much deeper. Here, the mortgage lender will review all aspects of your financial situation. They will check your credit, review your income and debt levels, etc. In many ways, the mortgage pre-approval is similar to the final approval process — though you’ll provide more documentation for the final approval.

The benefits of getting pre-approved for a California home loan are threefold. It will help you identify any qualification problems you have. It will help you limit your house-hunting process to the size of loan you might get. And it will also make the seller more likely to accept your offer. The seller (whether it’s a homeowner or a bank) wants to know that you’ve been given a green light by a mortgage lender. Granted, the pre-approval does not guarantee you’ll get the loan. But it’s the closest you can get to an actual guarantee before you’ve found a house. So it gives the seller the comfort of knowing your finances have gone under the microscope.

This completes our FAQ series about California home loans and mortgage lenders. If you would like to learn more about the mortgage process or what it takes to get a loan in 2011, you can use the search tool located at the top of this website. There are two sides to the Home Buying Institute. We have the news side you’re reading right now, as well as an educational side. The search tool will give you access to thousands of news stories, how-to articles, and other resources for home buyers.