Should I put down 20% when I buy in SF? Do I HAVE to?

Like I always say….it all comes down to strategy. The answer is not so simple, as it would be to say….people from your parents’ generation or even others that have been conditioned to thinking: YES, you must put down 20%, it’s the only responsible way here in San Francisco. While they have a point, it’s not the only one and depending on your own individual situation, it may not be the right path as a first time homebuyer.

Plenty of pros and cons of putting down that much, just from a pure surface level analysis here in the Bay Area. Putting down 20% assures you of avoiding PMI on your loan, securing a better interest rate (unless it’s a condo, then the sweet spot is 25% down), ending up with lower monthly payments and (finally), it improves your chances of overall loan approval in the end.

Some quick downsides can be (for starters) that 20% down is a SHIT TON of money!! With higher price points here in the Bay Area, that is no chump change that most first time buyers just have laying around in their liquid accounts. Putting down that much money also will almost assuredly deplete your cash reserves, which can leave you in pinch if you ran into an emergency, lost your job, needed to fix something expensive on your property, etc. Most important, I feel, is that there can be a better return on your money elsewhere as opposed to sinking it all into a home.

If you’re a first time homebuyer here in San Francisco with a lot of money saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible COULD be sensible for the reasons (PROS) I stated above. Or, maybe your situation is reversed. Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a lower down payment strategy while planning to allow the market to appreciate and make up the difference for you into the near future. In strong markets like San Francisco and the Bay Area, in general, even with modest appreciation rates you can be looking at making up 5-10% equity by way of appreciation in just a matter of a few years. In some rare cases, in as little as 1 year.

One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home in/around San Francisco. Similarly, you shouldn’t think it’s “risky” to make a small down payment. In fact, I strongly feel that the opposite is true when it comes to real state and financing here in the Bay Area for first time homebuyers. About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.

These last few years, I have sat down with many aspiring first time buyer and in most all cases, we have come to the decision to put down 10%, 15% on homes and keep some cash back on hand, leave it invested and earning more, or not have to borrower from family to round out the full would-be 20% down payment. While the reasons for going down this pathway may have been different for all of them, the end game was the same – they were all left in a better position for it, despite its incongruence with conventional wisdom.

There are tax advantages, as well, to looking into lower down payment scenarios and allowing the market to help make up the difference for you here in San Francisco. I love chatting about this very topic, so reach out anytime you would like to learn more and strategize on how it might make sense for you, too!
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20% Down is NOT Always Required to Buy a Home

You know….you don’t HAVE to put down 20% to buy a place.

In a market where prices, salaries, bonuses and the number of people circling on the few available properties are all HIGH, its easy to get caught up in the old myth that you MUST put down 20% to buy a home in San Francisco.   It has actually stopped many would-be buyers from owning a home, an is a concept/mindset from generations ago.  Many experts, including parents and financial advisors, have stated you must put down 20% in order to have skin in the game and really be serious about buying.  In fact, making a large down payment on a home can sometimes put your money more at risk than making a significantly lower down payment.
There are some obvious loan products in the market that allows for lower down payment, including FHA and USDA loans. down payment assistance programs and also piggy back loans (splitting the balance into 2 mortgages).  While these may not always be optimal on San Francisco properties, there are surrounding markets in the Bay Area that have a better climate of properties that match with such loans.  However, in the city or outside it, there are 3 and 5% down loan options (conventional loan programs) that can make a lot of sense and have attractive financing caveats.
Recently, I was working with a buyer that had struck out on 2 previous offers where he was intending to put down 20%.  In a strong market like the one we are in here in the Bay Area, faster appreciation rates can be put to work for you and allow for a lower down payment but also a higher potential sales price point, thus making you more competitive.  In the case of my buyer, we looked at a solid 15% down payment program with no PMI and still very good interest rates.    This allowed him to come in at a higher price point and finally win his offer.  6 months later, due to appreciation, we are refinancing him as if he had put down 20% in the first place into a more traditional product.  He got in, rode some appreciation from the Bay Area market, and let the market make up the difference for him in short time.
In most all cases, there are no differences in costs between loans with less than 20% down and those with.  Underwriting guidelines can vary, of course, so its important to be fully pre-underwritten in advance of making any offers with this strategy.  Ultimately, it can be to your advantage to look at putting down less than 20%.
  • You leave more cash available to yourself, in the event of something unforeseen or to perhaps make some initial improvements/enhancements to the home right away.
  • You are able to buy sooner.  Don’t let the market get away from you, just get IN.
  • You can invest cash elsewhere, where it can actually earn you a better return.
There is the “PMI” argument, on the other side.  This is an insurance you will have to pay for not putting down 20% in the first place.  Despite all its negative appearance, PMI is actually a good investment.  Over the last 5 years, PMI has yielded a 520 percent return to homebuyers that took it on.  On average, a buyer taking on PMI (for the short run) has paid out pennies in comparison to what they have netted back in appreciation from a hot real estate market.  Definitely some food for thought for Bay Area buyers as we rethink the entire mindset of how much should we be putting down when buying a home.
For more info and scenarios on putting down less than 20%, please email me here.

San Francisco Buyers Don’t Want to Be “House Poor”

Posted by Arjun Dhingra

SF Buyers are making great salaries, coming into cash from signing bonuses, or receiving gift funds from family to come up with large down payments.  Sinking all of the funds you have available into a property is often times assumed to bhouse-poore the correct strategy when it comes to setting up your home loan and property acquisition. However, nobody wants to find themselves house-poor.

When you’re “house-poor”, it means that the majority of your wealth is tied up in your home; and, that you have little cash in the bank or in savings. Such is the case for many Bay Area home buyers from this last year, as data shows that 8 out of 10 homebuyers that financed their homes ended up emptying all of their liquid accounts to make it happen. While this put them into optimal financing, perhaps because a larger down payment can improve your interest rate, etc., there can also be downside to this strategy.

Ending up house-poor can be dangerous — especially when life’s emergencies occur, such as sickness or job loss.  With all your funds locked up in home equity, and with little or no money in the bank, coping with a sudden increase in expenses or loss of household income can put your finances in a downward spiral and result in the loss of your home.  You can’t just ask the bank to give your down payment back, after all, when you need those monies to help you pay your monthly bills.

The only way to get your down payment back from the bank is via a cash-out refinance. But, even then, there’s no guarantee that your request gets approved.

Click here to apply now.

This is why home buyers sometimes prefer to make small down payments. It leaves money in the bank for when emergencies occur.  And, in life, emergencies always occur. Depending on loan size, down payments can be as little as 3%.  Jumbo loans can also be done for as little as 10% down for a loan amount up to $1.5M on special financing.  Yes, some of these programs with lower down payments do come with PMI (mortgage insurance, paid monthly), but the trade off for not having to empty your savings can be worthwhile in many cases. Strategies for financing the mortgage insurance/PMI into the borrowers rate can also be arranged, by taking a slightly higher interest rate in exchange for no monthly MI payment.

Another strategy that has been popular in markets where values have been quick to rise has been to put down 5-10% on a home and preserve cash.  Monthly mortgage insurance is incurred, but only until the borrower decides to refinance when enough appreciation has set in for the home to put the borrower in position to dump the MI from their monthly payment. Bay Area homeowners that employed such a strategy by refinancing in as little as 6-8 months, in many cases, took advantage of higher values to remove their mortgage insurance.

For more information on down payments, mortgage insurance removal, and getting pre-approved, email me.