Home buying in Los Angeles can be daunting. We hear the stories of all-cash buyers and bidding wars but that isn’t the biggest hurdle a buyer must overcome. The biggest hurdle is always your mindset.

The most common excuse we make is one the price of a home; “Houses in Southern California are too expensive. There is no way I can buy a million-dollar home”. Well, if you are a paying renter in LA, you most certainly can afford to buy a home.

Rent in LA County isn’t cheap and while the average rent in LA is $1,930 right now, many are paying between $2,500 and $3,500 a month in rent. With interest rates lower than they have ever been in 50 years, you have more buying power than you think.

I sat down (virtually) with one of Southern California’s leading mortgage lenders to see what kind of home one could buy with $4,000 a month.

Loan Types Are Based On How Much You Borrow

Every county in the US sets loan limits as a basis of how fees are charged and there are tiers to this structure: Conforming, High Balance Conforming, and Jumbo Loans. These limits fluctuate as home values change. How much you are borrowing will determine the type of loan limit you will have. Larger loans are riskier for lenders so High Balance and Jumbo have premiums in the form of one-time fees charged at closing.

Conforming Loans

The maximum amount a LA County Conforming Loan can be is $548,250. At 20% down, homes valued $685,313.00 and under fall into this loan category. A final purchase price of $685,313.00 at 20% down and a 2.65% interest rate and you have a monthly mortgage of $3,015.92 (this includes taxes and insurance).

Home Price: $685,313.00

Downpayment: $137,062.60

Interest Rate: 2.625%

Monthly Mortgage: $3,015.92

FICO Score: 660

High Balance Conforming Loans

If your goal is to have a $4,000 a month mortgage, you will fall into this category. As of January 1st, 2021, the LA County High-Balance Conforming Loan Limit is $822,375.00. With 20% down, homes valued from $685,314 to $1,027,969.00 fall into this loan category.

The final sales price of a home would need to be no greater than $905,750.00 to achieve that $4,000 a month mortgage.

Home Price: $905,750.00

Downpayment: $181,150.00

Interest Rate: 2.625%

Monthly Mortgage: $4,001.61

FICO Score: 680

Jumbo Loans

A Jumbo Loan is the loan type that would be used for anything over the high-balance loan limit of $822,375.00 up to $3 million. I will not go into this example in this article. Lenders can detail the nuance or contact me for a recommendation. Not all lenders are created equal.

Qualifying For a Loan

Pre-Approval is always the first step in home buying. This is a process where a lender will review your credit report. pay stubs, taxes, etc to determine your debt-to-income ratio. (DTI)

To calculate debt, they total up all of your monthly payments (cars, credit cards, loans, etc) and any mandated payments like back taxes or child support and the potential future mortgage payment To calculate income they look at gross paystubs or amortize the income from self-employed workers. The result is a ratio to determine if you can qualify for the loan type you seek. A qualifying ratio will need to be 44% or less DTI and up to 49% DTI with a FICO of 720 or higher.

Pre-qualification is something you can do online but does not hold any value because it is self-stated. Do not reply on an online Pre-Approval, talk to a lender to do it correctly.

Do I Have To Put 20% Down?

In this article, I use 20% down as an example. Conforming loans are often secured with less than 20% down, while high-balance are usually 20% down. In a competitive landscape, putting 20% down could mean the difference of your offer being accepted or rejected. Downpayments or a portion thereof can be a gift from a relative. If you want to have a discussion about your downpayment strategy, just reach out. Glad to share some insight.

Credit Scores And How It Effects Interest Rate

Since we knew the value of the dollar, we have been reminded the value of our individual credit scores and there is no time more true than when buying a home. Scores above 740 are golden and there is no major difference between 750 and 800. However, every increment below 740 will cost you in growing interest rates.

For High-Balance Conforming Loans, interests rate flex based on your FICO Score:

660 FICO: 3.5% plus 1% of the loan amount paid once (called points)

680 FICO: 3.5% (no points)

700 FICO : 3.125% (no points)

740+ FICO: 2.875% (no points)

Home buying in SoCal is challenging, but the reward is your financial future. Paying $3,000 per month for rent over ten years equates to $360,000 that you will never see again. Taking advantage of the ultra-low interest rates is well-advised because they can only go up from here and they most likely will starting next year.

Note: This article was researched and published in early December 2020. Rates, points, fees change daily.

For an easy Mortgage Rate Calculator, go to BankRate.com, where you can plug in mortgage amounts, home prices, and downpayment amounts based on today’s interest rates. Just know that it is not calculating your property taxes which could be as much as $900 a month on an $890,000 home.

Michael Robleto

Realtor- Compass Pasadena Ca

213.595.4720

michael.robleto@compass.com

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Michael Robleto

REALTOR®-Compass Real Estate

213-595-4720

michael.robleto@compass.com

Michael Robleto is a Los Angeles based REALTOR® that specializes in Historic Pre-War residential properties and those with architectural merit in Pasadena, Los Feliz, SIlverlake, Eagle Rock, and Mount Washington. Michael uses his vast knowledge of historic homes, residential construction, and modern-day marketing to predict and solve the many problems that arise in real estate transactions. His client accolades of insight, prompt communication, integrity, and hard work support the fact that he is not your average agent. 

Michael leverages his personal passion for historic architecture to provide his clients with the unknown insight into the pros and cons of older homes.  Michael, the son of a contractor, a California native, grew up in an older Bungalow home and has spent 23 years in Southern California admiring the unique architecture of the region. Michael brings 20+ years of negotiation and sales experience to his seven-year career in residential real estate.  He often writes on homeownership strategy, historic residential architecture, and related topics that can be found on Facebook, YouTube, Twitter, and Instagram under the common profile name of his blog; BungalowAgent. 

Michael is a committee member and frequent volunteer for the preservation efforts of Pasadena Heritage and the LA Conservancy.  When not working you can find Michael on hiking trails statewide with his faithful German Shepherd Axel.