Despite the low net migration levels, California homes continue to soar. Zillow currently estimates that the properties here now cost around $650,000—a staggering 12.5 percent increase compared to the previous year.
The LA Times also reported double-digit gains for homes in Southern California, some even crossing the $800,000 mark. In Los Angeles, for example, the median price increased by over 15 percent, so a typical home here will now cost $750,000.
So can Americans—millennials, particularly, still saddled with student loans—afford a house in the Golden State? The answer is yes because there are ways to make buying a home here easier on the pocket.
1. Buy a $1 Home
No, this is not a misreading, although these properties are incredibly rare to find in California. The state doesn’t have a formal $1 program because of the demand. Moreover, these often come with a lot of caveats.
Take, for example, a firehouse sold for a buck in Fremont, California. The ’50s’ property, which assessment said still had amazing structural integrity had a huge floor area of over 4,500 square feet. The kicker, though, is that the new owner could buy only the building, not the land.
Since the firehouse would have to be demolished to give way to a mix-used development, anyone who desires to live here needs to break this down and “bring it” someplace else.
Further, a lot of these $1 homes are run-down or so old they would have to be gutted in and out to meet the state’s building codes. But for potential homeowners trying to save money and willing to be patient in repairs and improvement, this can be an excellent deal.
2. Take the Time to Improve Credit Score and History
Although one’s credit score and history is not the sole criterion in approving a loan application, it plays a huge role. It provides borrowers access to low-interest mortgages or home loans with more favorable terms.
A good credit score may also bring down private mortgage insurance (PMI), which homeowners need to pay if their down payment is below 20 percent. This could add about $70 a month for every $100,000 loan and doesn’t disappear until borrowers have already paid a huge percentage of their principal. Making this affordable, therefore, can count toward huge mortgage savings.
The minimum credit score depends on the loan program. It can be as high as 620 for conventional mortgage lenders and as low as 580 for VA loans.
3. Insure the Home
In the United States, homeowners’ insurance isn’t required by law, but lenders may as a way of protecting their assets (the property is still theirs until the borrower pays off the loan). But even if they don’t, borrowers can still benefit from this policy.
It can use it as leverage to negotiate a more affordable loan term, especially if they’re living in expensive states like California. The coverage can help maintain or improve the value of the home. In case the borrower wants to sell the property, it can command a higher price in the market.
A California homeowners’ insurance coverage depends on what the property owner needs. It usually doesn’t cover damages caused by acts of God, like flooding, or fires. Some may have a separate insurance policy for that.
However, it can compensate damages or losses to structures inside and outside the home, like fences, garages, and sheds. It may even help in personal injury liabilities (e.g., a guest meets an accident in the property).
4. Explore Other Types of Loans
The United States now offers a wide variety of loans that make homeownership easier and more affordable to most Americans, millennials included.
- USDA Single-Family Direct Home Loans — Contrary to popular belief, a huge area of California remains rural. Here, home prices can be 50 percent cheaper than those in urban cities. But this specific program is designed for low-income families who don’t mind living in rural counties. Interest rates can be as low as 1 percent while the payment period can be as long as 33 years.
- Piggyback Loans — Also known as 80-10-10 loan, this is the closest to a no down payment homeowners can get in California (or elsewhere). It involves getting two mortgages to avoid jumbo loans, which one may need to apply for if the property price is beyond the conforming loan limit. In California, the maximum amount to pay for conventional mortgages is $548,250. Piggyback loans may also spare borrowers from paying private mortgage insurance even if they pay only 10 percent down payment.
California homes are expensive, but borrowers can learn to get smart. They can consider a multitude of options and ways to make them more affordable.