How to Buy a House in California: 6 Steps

Purchasing a house represents a major financial decision for most individuals. In California, the average home value is $784,989, which is considerably higher than the national average of $362,481. This disparity underscores the importance of careful financial planning and consideration when entering the housing market in California.

Understanding down payment assistance programs, mortgage types and state-specific regulations can help ensure a smooth journey toward homeownership in the Golden State. MoneyGeek has compiled essential pointers to assist you in navigating the homebuying process, from saving the down payment and choosing the ideal location to finding the best financing option for your needs and credit history. By familiarizing yourself with these aspects, you can confidently embark on your path to owning a home in California.

According to the U.S. Census Bureau, the homeowner vacancy rate in California for the second quarter of 2024 was 0.7%. The homeowner vacancy rate measures the proportion of homeowner-occupied housing units that are vacant and available for sale.

California's homeowner vacancy rate of 0.7% indicates a market where there is not enough inventory to satisfy homebuyer demand. A stable vacancy rate is 2%, which allows homebuyers some choice and flexibility in where to live. Potential homebuyers may face challenges due to limited housing options, leading to increased competition among buyers, potentially driving up home prices.

Before purchasing a home in California, it's important to review your financial and credit history closely. A strong financial profile increases your chances of getting approved when applying for a mortgage.

Your credit score significantly influences the mortgage loans and interest rates you qualify for. A higher score improves your chances of securing a reasonable rate. As of the third quarter of 2023, the average credit score in California was 722, according to Experian.

If you have bad credit, defined as a score below 580 on the FICO scale, buying a house is still possible. However, getting approved for a mortgage may be challenging. Check the table below to see which mortgage type is ideal for you based on the minimum credit score requirements.

Source: Experian

Your debt-to-income ratio (DTI) is a crucial metric for lenders to determine how much of your monthly income is allocated to debt payments. This ratio helps them assess how much mortgage debt you can responsibly manage. In the third quarter of 2023, the average mortgage debt in California was $432,456, according to Experian. This figure underscores the significant financial commitment that a mortgage represents, highlighting the importance of understanding your DTI when planning to buy a home.

Monthly debt payments included in your DTI calculation typically encompass mortgage payments, credit card bills, auto loans, student loans and other financial obligations. To get a clearer picture of your financial situation, use our debt-to-income ratio calculator below. This tool will help you determine your front-end DTI, which focuses on housing-related debts and your back-end DTI, which includes all monthly debt obligations. Knowing these figures can guide you in making informed decisions about your mortgage capabilities.

Buying a house you can't afford is a mistake that can lead to financial strain. To avoid this, consider the 28% rule, which suggests not spending more than 28% of your monthly income on your mortgage payment. This rule can help you determine a comfortable and sustainable payment, ensuring that homeownership remains a blessing rather than a burden.

According to the U.S. Bureau of Labor Statistics, the median annual income in California in April 2024 was $54,030. This translates to a gross monthly income of $4,503 before taxes. Applying the 28% rule, your maximum monthly mortgage payment should be approximately $1,261. This example highlights how this guideline can help you make informed decisions about home buying.

Use our mortgage calculator below to get a ballpark figure of your monthly mortgage payment in California.

A down payment is the initial amount you pay when buying a house, typically expressed as a percentage of the home's purchase price. Putting down 20% is often considered standard, but it can be a significant hurdle for many homebuyers. In California, where the average home value is $784,989, a 20% down payment amounts to $156,998. For homes above the average value, such as those priced at $850,000, the 20% down payment rises to $170,000.

Fortunately, saving up for a 20% down payment isn't a requirement. Many mortgage types allow for smaller down payments. For instance, VA loans offer the possibility of a 0% down payment, while FHA loans require only 3.5%.

Keep in mind that if you put down less than 20%, your lender may require you to take out private mortgage insurance. You can use our PMI calculator to estimate your monthly premium based on your credit score and down payment.

California offers several down payment assistance programs designed to make homeownership more attainable. These programs provide financial support to help cover the initial costs of purchasing a home, reducing the barrier for many prospective buyers. Detailed information on the available programs is shown in the table below. You can learn more by visiting the California Housing Finance Agency (CalHFA).

Finding the right location in California involves considering several factors. Start by evaluating the average house prices in different areas, which can vary widely across the state. Proximity to family, friends and work or school is also crucial. Access to public transportation, parks, restaurants and shopping centers can enhance your living experience.

The cost of living significantly impacts your decision when choosing a new home. According to the Missouri Economic Research and Information Center, California's cost of living index in the first quarter of 2024 was 145, which is higher than the national average of 100. Consider these essential expenses when selecting the right location:

• Food
• Healthcare
• Clothing
• Utilities
• Education
• Transportation
• Entertainment

Check out the table below for some cities in California and their average home values based on recent data. You can also use our cost of living calculator to help estimate how much you'll need to pay for all the essentials in different locations.

Source: Zillow

Working with a real estate agent can significantly speed up your house hunt in California. They offer the advice you need and handle paperwork efficiently, saving you time and effort. Real estate agents have access to an expanded list of property options you might not find on your own. They can also recommend other service providers like title companies and inspectors to assist in buying your home in California.

When finding a real estate agent, ensure you do your due diligence and interview those with experience in the neighborhoods you're interested in. Consider the following tips:

• Find someone compatible with your needs and personality
• Verify the agent's credentials, training and licensure
• Ensure they have in-depth knowledge of the area
• Shop around for agents and compare their rates

The homebuying process often begins with finding the best mortgage you can afford. In California, options include conventional loans, jumbo loans, FHA loans, VA loans and USDA loans. You can choose from 10-year, 15-year, 20-year, or 30-year terms and decide between a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Selecting the right financing option can boost your approval chances and save money over time.

Interest rates on a mortgage can fluctuate daily, influenced by the type of mortgage, the lender and the broader economic landscape. While interest rates reflect the cost of borrowing, the Annual Percentage Rate (APR) provides a more comprehensive view by including additional costs such as fees and insurance. This makes the APR a more accurate reflection of the true cost of borrowing. 

As of December 2024, the APR for a 30-year fixed conforming loan in California is 6.38%, while the APR for a 30-year fixed rate FHA loan is 7.14%. To see the current mortgage rates in California by mortgage type, please refer to the table below.

Getting pre-approved for a mortgage in California is a practical step in the homebuying journey. It helps you understand how much you can borrow, which can streamline your search for a home within your budget. Additionally, a pre-approval letter from a lender can make your offer more attractive to sellers, as it demonstrates your financial readiness. This letter is typically valid for 60 to 90 days, giving you a window to find your ideal home.

To obtain a mortgage pre-approval, you need to submit several documents, including:

• Proof of income, such as pay stubs or tax returns
• Credit history, usually in the form of a credit report
• Identification, like a driver's license or passport
• Bank statements to verify assets
• Employment verification

Home inspections are highly recommended in the homebuying process in California due to their role in identifying potential issues in a property. Inspectors usually examine various parts of the house, including the roof, foundation, plumbing, electrical systems and HVAC. The inspection report typically includes findings on the condition of these components and highlights any potential problems. This information is crucial for buyers to make informed decisions about their investment.

For example, an inspection might reveal significant issues like a faulty foundation or outdated electrical systems. These problems can affect the home's appraised value, potentially lowering it. In such cases, buyers might decide to rescind their offer based on the inspection results, opting to avoid future expenses and complications. Understanding the implications of inspection findings helps buyers navigate the homebuying process more effectively.

In California, home inspectors are not required to be licensed, but they fall under the regulation of the California Trade Practice Act (Chapter 338) of 1996. This legislation aims to protect consumers by prohibiting unethical practices, such as inspectors repairing properties they've evaluated within the past year. Understanding these regulations can help you navigate the home inspection process more effectively.

When searching for a home inspector in California, ensure they are reputable by checking their licensing status, even if not legally required. Look into what other clients have experienced by checking online reviews and asking for references. These steps can help you make an informed decision and avoid potential issues during your home buying process.

In California, home appraisals play a key role in the homebuying process by determining the market value of a property. Lenders rely on appraisals to ensure that the loan amount aligns with the property's worth. According to the 2023 Appraisal Survey from the National Association of Realtors (NAR), the median appraisal cost in 2023 was $500.

While both inspections and appraisals are part of the homebuying journey, they serve distinct purposes. A home appraisal evaluates the property's market value, whereas a home inspection assesses its physical condition. Lenders require appraisals to confirm that the property's value justifies the loan amount, protecting their financial interests.

Closing is the final step in buying a house in California, where the transfer of ownership occurs and you receive the keys to your new property. Your lender must provide a closing disclosure document three days before the official closing. This document outlines your loan terms, monthly payments and closing costs. Plan a final walk-through with your real estate agent near closing day to ensure the property is in the expected condition.

During closing day, you'll review and complete a lot of paperwork to finalize your home purchase. Here are some of the documents you need to sign:

• Final loan application: This document confirms the loan terms and conditions you agreed upon with your lender. It ensures that all the financial details are accurate and up-to-date.
• Deed transfer: This legal document transfers the property ownership from the seller to you. It is essential for establishing your rights as the new homeowner.
• Promissory mortgage note: This is a legal document where you agree to repay the mortgage loan. It outlines the repayment terms and your obligations as the borrower.
• Homeowners insurance: Homeowners insurance in California can protect your new home from potential risks and damages. It provides coverage for various perils, ensuring that your investment is safeguarded.

Closing costs are fees paid at the end of a real estate transaction, covering various services needed to finalize the purchase. In California, these costs average $8,028, according to NAR. Some of the fees included are:

• Appraisal fee: This covers the cost of having a professional appraise the property's value.
• Title search and insurance fee: This fee ensures there are no legal claims against the property.
• Escrow deposit: Funds held by a third party to cover property taxes and insurance.
• Prepaid costs: These are upfront payments for future expenses like homeowners insurance and property taxes.
• Other closing costs: This category includes various additional fees such as recording fees and attorney fees.

If you are a first-time homebuyer, learning the different first-time homebuyer programs in California can also help you achieve homeownership faster.

Buying a house in California is a significant financial commitment that lasts for years. We answered some frequently asked questions about buying a house in California to kickstart your homebuyer journey.