How to Buy a Home in California

California looms large in the imaginations of many people around the United States and the world. Whether it’s the allure of Hollywood, the natural beauty of its beaches, forests, deserts and mountains, or the draw of big cities like San Francisco and Los Angeles, the state seems to have something to appeal to everyone.

Starting with the Gold Rush days of the 1850s, through the Depression era and beyond, many people view California as the epitome of the American Dream.

For many, that dream includes buying a house in California. However, with a notoriously expensive housing market, both long-time residents and newcomers are asking the same question: Is it possible to buy a house in California?

An Overview of California’s Housing Market

California is known for having one of the most expensive housing markets in the country, with a median sales price of $806,490 in February 2024, according to the California Association of Realtors.

But in a state with 164,000 square miles and approximately 39 million residents, there are a wide variety of local housing markets to choose from.

Statewide, California’s home sales prices climbed steadily from 2012 to 2022, with a slight decline beginning in late 2022 when mortgage rates sharply increased. But, like many other regions in the U.S., California has a shortage of housing compared to demand, which keeps prices high.

For example, San Diego has experienced the biggest home sales price increases in the nation in recent months, up 11% in January 2024 compared to January 2023, primarily because of the limited number of homes for sale.

Deciding Where to Live in California

Despite its reputation for expensive housing, the size and of the state means there are also many options to buy a home in California. In general, coastal areas and major metro areas have the costliest homes.

At the same time, those cities offer an abundance of job opportunities. San Francisco is well-known for its tech-based economy, particularly with Silicon Valley nearby. The economy in Los Angeles, which most people associate with tourism, entertainment and media, also encompasses healthcare, education and financial services. San Diego’s economy, closely tied to the U.S. Navy, includes defense industry and technology jobs.

If you can't afford an expensive market, consider looking near one. For example, the median house price in Los Angeles has been hovering near $1 million. Yet, if you take a look at nearby communities, you can find commutable options with much lower housing costs.

Steps to Purchasing a Home in California

The steps that lead to homeownership in California are similar to buying a house in another state. You’ll need to be financially ready to become a homeowner, and you’ll need to identify experienced professionals who can provide you with trustworthy advice.

Starting here can help make buying a home in the Golden State feel less daunting.

Step 1. Review Your Finances

While it’s tempting to head straight to the internet and start home shopping, the wiser way to begin the home buying process in California is to do a dive deep into your finances. A smart strategy can help you open the door to homeownership even in this expensive state.

For example, consider that your down payment can range from 3% up to 20%, depending on the mortgage you qualify for. But don't forget to account for the other costs of buying a home, such as closing costs and real estate agent fees.

You'll also need to account for many costs when budgeting for a home. Don’t forget to allocate funds for taxes, insurance, emergency home repairs, general upkeep and other expenses associated with homeownership.

Step 2. Review Your Credit Health

Every lender reviews your credit report and credit score when determining how much you can borrow and, if you’re applying for a conventional loan, your interest rate. Borrowers with higher credit scores are likely to pay the lowest interest rates.

You can check your credit report from each of the three credit reporting bureaus – Experian, Equifax and TransUnion – for free once a year at annualcreditreport.com.

Don't forget to look for errors when you request your credit report. More than one-third of consumers found errors in their credit reports, according to Consumer Reports. Fixing those errors can sometimes take months, so it pays to check your credit report and make sure it's accurate before you apply for a mortgage.

Step 3. Consider CalHFA if You Are Eligible

Special loan programs and down payment assistance programs are available through the California Housing Finance Agency (CalHFA). While CalHFA doesn’t provide loans directly, it works with preferred lenders who are familiar with their programs.

Unfortunately, fraudsters often mislead aspiring homebuyers by pushing fake programs, so be certain to get your information from the official CalHFA site linked above before you investigate further.

Eligibility for various loan programs depends on your income, minimum credit scores and other factors.

Don't Forget About Down Payment Assistance

Down payment and closing cost assistance is available through the MyHome Assistance program for qualifying first-time homebuyers in California and can be used for 3% or 3.5% of the purchase price or appraised home value, depending on whether you choose FHA or conventional financing.

Explore Other CalHFA Options & Grants

In addition to loan programs and down payment assistance, CalHFA offers a shared appreciation program for first-generation homebuyers known as California Dream for All.

This program provides up to 20% of the purchase price for closing costs or down payment funds, not to exceed $150,000. The down payment assistance and a share of the home’s appreciation must be repaid when the home is sold. Borrowers who qualify for this program must all be first-time buyers and at least one borrower must meet the first-generation criteria by not having owned a home within the past seven years. Their parents cannot have owned a home in the past seven years either. Borrowers must also meet income limits that vary by county.

City National Bank offers a “Ladder Up” grant up to $20,000 that can be used for down payment funds, closing costs or to buy down the mortgage rate.

Step 4. Meet With a California Lender

While some people opt for a quick search online to find a lender, it’s important to choose a lender thoughtfully and find the best fit with your financial and home purchase goals.

A local lender might be more experienced with market conditions and familiar with local or statewide programs to help you make your purchase.

Meeting with a local lender and getting a loan approval based on full documentation of your income, assets, job history and credit report can give you – and the home sellers – the confidence that your transaction will be successfully completed.

Keep in mind that when you buy a house in California lenders approve you based on a set of guidelines including the size of your down payment, your credit history and your debt-to-income ratio, which compares your monthly income to your minimum payment on recurring debt.

You may or may not want to borrow as much as you qualify for, particularly if you want to contribute more to your retirement fund, to save for college, or to meet other goals.

Importantly, you should review important questions to ask your mortgage lender to help you make the right decision.

Step 5. Connect with a California Real Estate Agent

Ask your lender, colleagues, family and friends for referrals to a real estate agent, and then take the time to interview a few. Your real estate agent should be someone you trust with your financial details and to give you good advice.

An experienced agent with deep knowledge of homes in the area where you want to live and in your price range can provide you with insights you may miss on your own.

A good real estate agent will help you recognize the appropriate value of a property and should be able to provide you with advice on maintenance and improvements that you can make in the future to increase the property value. Your agent will represent you during negotiations and advise you on the best way to make a strong offer for the property you want.

Step 6. Find Your Home & Make an Offer

Nearly every homebuyer must compromise on some features of their "dream home." Before you start your home search in California, make a list of your priorities and narrow the features you must have versus those you want.

For some buyers, the neighborhood is the most important feature, while others want a particular size or style of home. Some buyers want a newly built home or one in perfect condition, while others are willing to make cosmetic changes or do major repairs.

Many locations in California have housing shortages, which means buyers must compete for homes. Your real estate agent can help you decide how much to offer on a home and let you know if you must move quickly to win a bidding war.

Bidding on Homes in California

Sometimes, you’ll need to offer more than the listing price of the home. In other cases, you may want to offer an “escalation clause” that commits you to paying a certain amount above the highest bid. Sellers might also have preferences about the closing date, so being flexible can help you seal the deal.

You may also find yourself with a gap between the appraised value of the home and your offer, in which case you should identify a source of extra funds if needed. Your real estate agent may also be able to arrange a “pre-inspection” before you make an offer, so you know about the scale of any potential problems ahead of time.

Your real estate agent will handle negotiations with the seller’s agent until there’s mutual agreement and a signed contract.

Step 7. Closing on the Home

After you’ve made an offer and it’s accepted, your real estate agent should keep you up to date on the timeline for your next steps, such as a home inspection. Your lender will arrange an appraisal of the property. You may have homeowner association documents to review or other inspections specific to the property.

Your lender or your real estate agent can recommend a title company that will do a title search on your property and provide you with title insurance. The title company or escrow company will handle your closing. While your lender will require title insurance to cover their lien in your property, optional owner’s title insurance may be advisable to protect your home equity in case of a claim against the title in the future.

You’ll need to arrange homeowners' insurance before the closing. Contact several companies to compare rates and the policy coverage. Your lender will let you know if you must have flood insurance, but even if it’s not mandatory, you may want to discuss extra insurance for various natural disasters - notably earthquake insurance in California - depending on where your home is located.

Just before the closing, you and your real estate agent will walk through the property to make sure it’s in the same condition as when you signed the purchase contract. Once you’re sure the house is in good order, you’ll sign the paperwork at the closing and get the keys to your new home once escrow closes.

California Home Buying Differences

Some things in California are different than other states. For example, if you're purchasing a home in the state of New York, you need to work with an attorney to complete the process.

In California, you are not required to work with an attorney to complete the purchase of a home. However, in some instances, it might be advisable to do so.

Here are some other details about buying a home in California:

Dual Agency

When you buy a house in California, the real estate agent can represent both the buyer and the seller as long as both sides are aware of the arrangement. Be sure to ask your real estate agent about who they represent.

Seller Disclosures in California

California real estate law mandates that sellers must disclose the condition of their property and any defects such as pest issues or environmental concerns.

Natural Disasters, Such as Earthquakes & Wildfires

California is beautiful, but there are some risks that come with buying a home in the state. This can make it more difficult to get proper insurance depending on where the home is. Some homeowners' insurance companies do not insure homes in the state because of the risk of wildfires, mudslides or floods and possible high payouts associated with them.

Because of this, be prepared for higher homeowners' insurance premiums in some parts of the state. Find out if special insurance policies are available or recommended for earthquakes and floods in your area. You can ask the sellers whether they have extra insurance and whether they have taken steps to make the home more resilient to natural disasters.

Buying a Home in California Could Become More Affordable

Recently, the National Association of Realtors settled in a landmark class-action lawsuit that accused it of inflating the commissions that its agents made when selling homes.

In addition to paying a settlement, the group has agreed to change the way that it handles commissions for its agents. In short, real estate agents from the association will no longer publish a flat commission rate in home listings. Instead, a rate will be agreed on during negotiations, enabling homebuyers a chance at having lower commission rates than possible in the past.

Is Buying a House in California Worth It?

While California is known as one of the more expensive markets for buying a home, rents are also high in the state. When you buy a house in California rather than rent, you might be able to build wealth through your real estate investment. However, this is contingent on the cost of your home, the amount of your mortgage and the health of your local real estate market.