Buying a House in California
The housing market in California has been a roller coaster ride in recent years. Home prices soared during the pandemic and then began cooling rapidly. In fact, on a list of top metro areas with the biggest drop in sale prices in 2022, California had more cities listed than any other state.
This is good news for first-time home buyers who have been waiting for prices to become more affordable. At the same time, some home buyers—viewing a home as an investment—may be concerned about buying a home and then seeing its value drop further.
But for those looking at what is right for their family with an eye toward the long term, a home purchase at this time can be the right move, no matter what the market is doing. That’s because a home is more a necessity than an investment. Home purchases and sales are difficult to time perfectly to the market, as for most families, they are dictated more by life changes than housing market trends.
Those looking to make a move for the long term have little to worry about anyway since prices historically trend upward. They can be expected to rise again, building up equity along the way.
When it is time to buy a home, no matter the state of the housing market, research, and planning are keys to success. Below are some ingredients to a successful home purchase in California.
How to Buy a House in California in 9 Steps
As the California housing market has cooled, interest rates rose, posing a different challenge to those who have been waiting to buy a home. The good news is that falling home prices help to balance out higher rates.
With a good team of professionals to help, home buyers in California can get the most for their money by sprucing up their finances, researching locations and home financing, and negotiating the best deal possible on the home they’ve been waiting for.
Here are 9 steps to a successful home purchase in California.
Step 1. Evaluate Your Finances
In a housing market as expensive overall as California’s, most homebuyers want to stretch their available funds as far as they can. Preparing ahead of time can help you get your finances in the best shape possible before applying for home financing.
Things you can do include researching the market, boosting your savings, and increasing your credit score.
What Is the Average Cost to Buy a House in California?
California’s median home price is the highest of any U.S. state except Hawaii, at $684,800 as of late 2022.
Home prices vary widely throughout the state, although even the least expensive city in California still costs more than a typical home in the average U.S. city. At the high end, in San Francisco, the average house costs $1.3 million. Sacramento and Bakersfield, on the other hand, are much more affordable, at $440,000 and $330,000 respectively.
What does that mean in terms of monthly payments? In the ideal case of a 20% down payment, that would mean as much as $260,000 down and monthly payments of more than $7,000 for the average house in San Francisco. Fortunately, buyers on a budget can look in less costly regions of the state, and programs exist to help lower down payments substantially, especially for first-time homebuyers.
FHA loan programs—which are available through both mortgage lenders and Islamic home financing providers—allow for a down payment as low as 3.5%. The caveat, however, is that there are limits to the amount of financing that can be provided through FHA financing, so a mortgage may not cover the full remainder of the home price.
A home financing provider can help you run numbers on what you may be able to afford to buy and advise on what programs are available to you.
How Much Do You Need to Make to Buy a House in California?
Following advisers’ guidelines, a home buyer should earn close to $150,000 per year to buy the median-priced home in California. Given the wide range of home prices in the state, however, the necessary income can be a bit lower or much higher, depending on the neighborhood where you are looking.
To explain further, here’s a breakdown using the median home price of $684,000:
If a buyer puts a full 20% down on a home at that price, the down payment would amount to nearly $137,000, and monthly payments at a 7% interest rate would be about $3,600.
Since advisers recommend keeping housing costs below 30% of your income, a home buyer should earn $12,000 per month or $144,000 per year to buy a home at that price.
Buyers earning less than this income will want to consider less expensive regions of the state.
>> Related Read – Is It Better to Put a Large Down Payment on a House?
What Credit Score Is Needed to Buy a House in California?
Typically, a homebuyer will need to have a minimum credit score of around 600 to qualify for financing. A higher score would be better, as it will help reduce the rate you will pay each month.
Your interest rate—or, in Islamic financing, the market rate you qualify for—can make a big difference in the amount of money you will ultimately pay for your home. In determining that rate, your credit score is an important factor.
When you apply for a mortgage or for alternative home financing, your provider will check your credit score. Your credit score is a number between 350 and 850 that is calculated based on your history of handling debt. The higher the score, the better.
There is no solid cut-off point to be approved for financing, but home financing providers typically want to see a score of at least 600. The higher your score, the lower the interest rate they will offer you. So protect your credit score by making payments on time.
Step 2. Explore Your Home Financing Options
A homebuyer has a wide array of options to choose from for financing their new home.
In the past, a conventional mortgage from a bank was the default choice for home financing, but many other options exist now.
Banks are far from the only mortgage providers these days: Many non-bank mortgage financiers now offer this service as well. They can offer more flexibility than banks, but it is important to research a company carefully before making such an important decision, in order to ensure that you will have a good experience.
More choices are also now available in the types of financing available. Many homebuyers in America still choose a traditional mortgage—a loan that the buyer will repay along with interest. However, conventional mortgage loans and FHA loans bring with them some drawbacks and hidden risks, as the lender-borrower relationship is inherently inequitable and some lenders take advantage of that situation.
Partly because of this, other options are now growing in popularity, including forms of interest-free home financing based on a different concept from a mortgage loan.
One fast-growing alternative to a traditional mortgage is Islamic home financing, which is sometimes called an Islamic mortgage although in reality it isn’t a mortgage at all. Islamic home financing has many differences from a conventional mortgage, beginning with the fact that it is a partnership rather than a loan.
Guidance Residential pioneered an authentic Islamic model of home finance in the U.S. based on a co-ownership arrangement, in which the financier purchases the home together with the homebuyer. The homeowner will then gradually buy the financier’s share of the home while paying a fee to use the entire property.
At all times, the homeowner retains full homeownership rights to the property. This way, the company shares certain risks that a traditional lender does not, but the homeowner still receives all of the profits when the home is sold.
This model of home financing has allowed tens of thousands of American Muslims to buy a home in keeping with the values of their faith, which prohibits the use of interest, or riba. It also appeals to homebuyers of other faiths who prefer this more equitable arrangement.
>> Related Read – Do You Have to Be Muslim to Get a Riba (Interest) Free Mortgage?
Step 3. Get Pre-Approved for a Mortgage
Many home buyers are tempted to rush into looking for homes once they decide it’s time to buy, but it’s important to get pre-approved for financing first.
Not only will pre-approval help you to narrow your search and prevent disappointment, but it will also show real estate agents and home sellers that you are serious and ready to buy. It also will speed up the process when you’re ready to make an offer and prevent delays that can cost you the home of your dreams.
You might be wondering what is the difference between pre-qualification and pre-approval. If you’re just getting started and only want an estimate of the home price you might be able to afford, you can start with pre-qualification, in which you supply numbers such as income and major expenses but you don’t submit any documentation, and no credit check is performed.
Since the financier is not evaluating your data, pre-qualification provides only a rough estimate that can help you begin planning. You can pre-qualify quickly online by supplying estimates of your income and major expenses, and you will receive your result in just a few minutes.
Better than pre-qualifying, however, is pre-approval. After providing documentation, you will receive a letter from your financier letting you know whether you qualify for financing, how much they will provide, and what mortgage rate they are offering you.
This pre-approval letter will be very useful to you. Many real estate agents will not show homes to buyers until they have a pre-approval letter. It saves both you and the realtor time and helps you target your search toward homes you can afford.
Sellers will also want to know that you have financing lined up when you make an offer on a home. If two buyers make an offer on the same home and only one has been pre-approved for financing, the seller will typically choose the one with pre-approval.
After your offer is accepted, pre-approval speeds up the rest of the financing process. At a time when you are busy with inspections and appraisals, you will not want to be hunting for past tax forms – you’ll be very glad that part is already done.
When you’re ready to apply for pre-approval, you’ll need to gather documents and check your credit score if you haven’t already. Here are five things to do before getting pre-approved for home financing.
>> Related Read – How Long Does a Pre-Approval Take? A Case Study
Step 4. Find a Real Estate Agent in California
Now that you have financing lined up, you’re ready to start looking at homes! It’s important to find a good real estate agent to help you in your search.
Your real estate will plan an important role in making your home search a positive or negative experience for you. They will be your partner and guide, helping you find the right home for your family and advising you on aspects you may not have considered. They will represent you in negotiations with sellers, and make many arrangements for you, such as an inspection and appraisal.
It is important to choose an experienced real estate agent who is very familiar with the part of California where you want to move. You will also want to choose someone you feel comfortable with, as you’ll be spending a great deal of time together.
It is a good idea to ask questions before choosing a realtor. You may want to ask about their experience and how long they have worked in the local area, and you can ask them for references to call.
>> Related Read – Recruiting a Real Estate Agent? 5 Questions to Ask
Step 5. Select the Right Location
The third-largest state in the U.S., California is actually bigger than the majority of countries in the world. With a land mass this large, the state offers a wide range of choices in terms of climate, culture, opportunities, and cost of living.
Costs are an important factor to consider when choosing a neighborhood to buy a home. California is the third most expensive state to live in. Housing isn’t the only thing that’s expensive – gas, utilities, and grocery prices are high as well. Make sure to check the cost of living in cities you are considering using one of several cost of living calculators available online, such as these from NerdWallet and CNNMoney.
Also, keep in mind that California charges high income and sales taxes compared to other states. Property tax rates – while complex – are more moderate, but since home prices are so high, property tax bills are high as well. Median annual property tax bills vary widely by county, from around $1,000 to $7,000. Ask your realtor for information on taxes in the localities you are considering.
What Are the Best Places to Live in California?
In order to narrow down locations to consider in California, decide first on what is most important to you. Is it budget? Job opportunities? Lively culture with many things to do? Or maybe access to state and national parks for beautiful views and outdoor adventures?
If budget is a major concern, Bakersfield is a top city to consider. This city is fairly quiet, but you can get to Los Angeles or San Francisco in a few hours’ drive. Work opportunities focus on industries including agriculture, health care, and oil; however, this also leads to concerns regarding pollution.
Fresno and Modesto are fairly affordable as well. Fresno offers more opportunities in technical fields, but higher crime rates and air quality concerns, while Modesto has a lower crime rate.
The state’s capital city, Sacramento, is a popular choice for families, with a reasonable cost of living, many educational opportunities, and plenty to do. San Jose, in the heart of Silicon Valley, is also popular with families with parents working in tech fields, but the cost of living is among the highest in the country.
Oxnard and Vallejo are beautiful choices on the outskirts of major cities, offering views and a more relaxed lifestyle than you’ll find downtown in major metro areas.
San Diego’s broad appeal cannot be denied, with its beaches, its beautiful weather year-round, and its vibrant lifestyle. This sunny city particularly appeals to young adults who can afford its higher cost of living.
San Francisco, near Silicon Valley, draws many entrepreneurial types to its tech startups and financial companies. It is, however, one of California’s most expensive cities to live in.
Los Angeles – home to Hollywood, Disney Land, and major professional sports teams – is the definition of the high life, offering a wide range of job opportunities and leisure activities for high-income families who can tolerate traffic jams and higher crime rates.
>> Related Read – How Do I Know If A Neighborhood Is Safe? 4 Ways to Check
Step 6. Begin House Hunting in California
The best time to buy a home in California depends on your priorities. Many families look to buy in late spring and move in the summer to avoid disrupting children’s classes at school.
In recent years, house prices have been lowest in April and highest in November. Mortgage rates, on the other hand, have been lowest in December, while housing inventory – meaning the number of homes you have to choose from – has been highest in May.
It’s a good idea to begin keeping an eye on house listings well before you want to buy a home, and maybe even pop into the occasional open house. This gives you an idea of the cycle of the market and what you can expect to find.
When you begin looking seriously, make a list of must-have features and nice-to-have features, and use it to help you narrow down your search. Talk candidly with your real estate agent so they can help you choose neighborhoods to focus on.
>> Related Read – How to Find Houses Before They Hit the Market
Step 7. Make an Offer (and Get It Accepted)
In a competitive housing market like California’s, it’s important to decide on your budget and stick with it. Don’t be swayed by a home’s beauty or a bidding war.
When you’re ready to make an offer, your real estate agent will help you decide on a reasonable offer that has a chance of being accepted. You may decide to offer the price the seller is asking, or you can make an offer that is higher or lower.
In deciding on your offer, take into account considerations like the home’s conditions and any renovations the seller has done or that the home may need. Also, take note of when the home was listed on the market. If it’s been sitting for a while, the seller may be motivated to accept a lower offer.
Your realtor will also discuss which contingencies you may want to place on your offer. Common contingencies would allow you to walk away from the sale if there are major problems with the home inspection or title of the home, or if it appraises for less than the sale price. Other possible contingencies could allow you to cancel the sale if there are problems with your financing or the sale of your current home.
Contingencies make your offer less likely to be accepted, so consider your choices carefully. In a hot market, some buyers forgo all contingencies, but this is risky as you could end up with a home with expensive and potentially dangerous problems.
Your offer will also need to state how much earnest money you want to put down. Earnest money is a deposit that comes from your down payment that you are willing to pay upfront. It would be forfeited if you back out of the deal for reasons that are not covered by the contingencies. Earnest money is usually 1% to 2% of the purchase price.
Once you’ve settled on the terms of your offer, your real estate agent will write up the proposed contract and present it to the seller.
>> Related Read – Can You Make an Offer Without a Pre-Approval Letter?
Step 8. Obtain a Home Inspection and Appraisal
Once the seller accepts your offer, there’s a lot to do quickly.
Your real estate agent will schedule appointments such as an appraisal to determine the home’s value. An appraisal is typically required by your financier to ensure that the home is worth what you have agreed to pay for it.
Unless you’ve decided against it, your realtor also will schedule a home inspection to check for structural problems and to evaluate major systems like electrical, plumbing, and HVAC. Inspections are not required in California, but the few hundred dollars they cost can offer a great deal of peace of mind that you are not going to end up with dangerous or expensive problems in your new home.
You may ask to attend the inspection if you would like. Buyers can learn a great deal about their future home by observing and even talking with the inspector as they examine the house from top to bottom, inside and out. Afterward, the inspector will provide a detailed report for you and your realtor to review.
If the home inspector finds problems, you may choose to have your realtor ask the seller to make repairs or to reduce the price. If they refuse – as long as you included a home inspection contingency in your contract – you can cancel the sale and your earnest money should be returned.
You may need other types of inspections as well, such as a separate septic inspection if the home has a septic system. As the buyer, you will be responsible for paying for these inspections, but they can save a great deal of money later.
>> Related Read – What Not to Do Before & When Buying a House
Step 9. Close on Your California Home
Now that all of these inspections are over, it’s almost time to close on your new home.
Closing in California may take place at more than one event. It includes signing papers for your home financing, the release of funds from the financier to buy the home, and the recording of documents at the County Recorder’s office. The official closing date is not necessarily the date you sign papers but the date the documents are recorded.
As part of closing, also known as settlement, you will need to bring your down payment for the home, plus closing costs, which cover a variety of fees involved in your purchase of the home. California closing costs include the real estate agent commission, title insurance, inspection costs, and more, typically adding up to about 3% to 5% of the sale price of the home.
>> Related Read – Ultimate Moving Guide + Moving Across-Country Checklist
The Bottom Line: Buying a House in California Is Easier With Our Help
There’s a lot to do to buy a home in California, but you don’t have to do it alone. Choosing the right team of experts to help can make your homebuying journey much easier and ultimately more successful.
Guidance Residential, the #1 provider of Islamic home financing in America, can help you with financing that aligns with your values, as well as with finding an expert local real estate agent, thanks to Guidance Home Services.
Ready to take the next step on your homebuying journey? Get pre-qualified online in fewer than 10 minutes, and let Guidance Residential connect you with a knowledgeable and reliable real estate agent in California to ensure your homebuying experience goes smoothly.