The real estate market in the Bay Area is sizzling like a hot dog on a San Francisco street vendor’s griddle. As the median home price tops $1 million for the fifth month in a row, competitive buyers are flocking to the area to fight for properties near tech centers. The Bay Area has always had a lot to offer to the hippie, techie, fashionista, and foodie culture of California. With its rolling hills, Mediterranean summers, and Golden City architecture, 2021 has been a popular year to buy. But how can buyers ensure that they are choosing the best Bay Area home mortgage?
If you’re looking for a place to settle down in the Bay Area, you’ll need a Bay Area home loan. In fact, the majority of people can’t afford to buy their home up front without one. Sifting through the myriad of financing options available can be overwhelming to first-time homebuyers. Picking the right one can save a significant amount of time and money over the years.
What is a home purchase loan?
The average price of a home in California is approximately $815,000. Unless you have that much cash in your back pocket, you’ll likely need a loan when purchasing a Bay Area home. A home purchase loan allows you to borrow a substantial amount of money to buy a house, using the property as security. Housing prices often exceed a million dollars in regions all over the Bay Area. For this reason, careful consideration while choosing your home loan is imperative to saving money long-term.
The most common loans used to purchase homes in the Bay Area include fixed rate loans, jumbo loans, and adjustable loans. Depending on the buyer’s circumstances, they may be eligible for an FHA home loan, a VA home loan, or a USDA home loan.
Great for buyers with a high credit score looking for higher loan limits and lower interest rates.
- Key Information: A conventional loan is a mortgage loan that’s not insured, guaranteed, or backed by a government agency. They can be conforming or noncomforming.
- Pros: They have low interest rates, higher loan limits, and better flexibility. They are usually less costly than loans that are guaranteed by the federal government.
- Cons: Conventional loans have strict requirements to qualify for. They require a larger down payment, lower income-to-debt ratio, a higher credit score, and potentially a private mortgage insurance.
Conventional loans are mortgages that are not insured by the federal government. Instead, they are serviced by private mortgage lenders such as credit unions, banks, or other financial institutions.
Conforming Conventional Loan. A conforming conventional loan meets the funding criteria and lending rules set by Freddie Mac, the Federal National Mortgage Association, and Fannie Mae, the Federal Home Loan Mortgage Corporation. This type of loan cannot exceed a certain dollar limit. In 2021, the limit is $548,250 but is higher in more affluent areas. San Francisco and New York city boast a ceiling of $822,375 or 150% of $548,250.
Nonconforming Conventional Loan. A non-conforming loan is simply any mortgage that doesn’t conform to Freddie Mac, Fannie Mae, or government requirements. An example could be jumbo loans, which are often above Fannie Mae and Freddie Mac limits. The requirements for a nonconforming loan typically vary more by the lender you’re applying with and the type of mortgage you’re applying for.
Great for high-income individuals looking to buy luxury homes, homes with lots of land, or multi-family investment properties.
- Key information: Jumbo loans exceed the limits set by FHFA, the Federal Housing Finance Agency. They are considered nonconforming because they do not comply to those limits.
- Pros: Remember, the conforming loan limits range from $548,250 up to $822,375 for 2021. A nonconforming jumbo loan allows you to borrow more money than these limits allow. This can open up buying options and is often preferable to taking out multiple mortgages.
- Cons: Jumbo loans require buyers to have a high income with a large amount of cash reserves and a great credit score. These loans often come with high interest rates, higher closing costs, and a higher down payment.
Ideal for buyers who can pay off their loan in a few years or those who plan to relocate in the near future.
- Key information: An adjustable-rate mortgage is a type of mortgage in which the interest rate applied to the outstanding balance changes throughout the lifespan of the loan. At the end of a fixed-rate period with an adjustable loan, the interest rate resets in intervals from monthly to yearly.
- Pros: In the fixed-rate stage, payments may be relatively low. Payments could even decrease if interest rates fall. Some buyers enjoy the flexibility of paying the fixed-rate-stage and then selling before the adjustable period starts.
- Cons: If interest rates increase, your payments during the adjustable period will increase. You may face prepayment penalties for selling or refinancing the loan within the first five years. Even with meticulous planning ahead, the adjustable period may bring rates that you cannot afford, forcing you to sell the home.
A common choice for first-time home buyers, FHA loans require lower minimum credit scores and a lower down payment.
- Key information: An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. They are typically offered by mortgage lenders that have been approved by the FHA.
- Pros: FHA loans make it easier to buy a home and get out of the renting cycle. FHA-approved lenders accept lower credit scores and a lower up-front down payment than other nonconforming options.
- Cons: You’ll have to pay mortgage insurance to protect the lender. The property must also meet FHA requirements, which could limit your choices, and the price is relatively comparable to conventional loans.
These are just a few of the most common Bay Area home loan options. Buying a home can be both exciting and scary, and getting informed on basic home financing can save you a significant amount of time and money in the long run.
Talk to Us
If you’re looking for a mortgage broker in your area, contact The Mortgage Genie by calling (925) 648-0981. With decades of experience and expertise, our team can help you to find and secure the right Bay Area home loan for you.