First time buyer loan programs can sound appealing, but often times have unfavorable terms under the hood such as huge mortgage insurance premiums and higher interest rates. However, California just announced a new first time buyer loan program that likely won’t last long. This is an effort to help solve the affordable housing crisis in California, so let’s start with some terms and then I’ll break down why I like this for first time buyers. Below is my interpretation of this new loan program as a real estate professional, but please verify with a lender and the CalHFA website.
When using this new HFA program, California will assist in up to 20% of a down payment. This is a huge amount of money in California real estate markets where at the time of writing this, the median sale price in Monterey county is $731,500, down 11.6% from this time last year. That’s almost $150,000 that California assists with in this example. The buyer will get two loans – a first and a second. The first is the larger loan, let’s call it 80% for this scenario. That is the first position lien. The buyer is underwritten to qualify for just the first mortgage, not the first and second! That’s great news considering the buyer is getting financing for 100% of the purchase, not just 80%, but only has to qualify for 80%. CalHFA takes a second lien position on the property subordinate to the first lien holder. When a buyer goes to refinance or sell the property, California will recoup its initial investment plus 20% of the property’s appreciation. Shared appreciation is capped at 2.5 times the initial principal amount.
There are a few reasons why I think this is a wonderful program. Certainly nobody wants to share equity, but it’s only 20% of the appreciation, and if it enables a first time buyer to control a real estate asset in an expensive market, I think it should definitely be considered as a strategy for long term wealth building. One obstacle for many first time buyers is they will have saved a substantial amount of money for a down payment, but in order to get into a neighborhood they want or a square footage that they can grow into for years to come, they would have to consider buying a fixer upper, and most of their money saved would go toward their down payment leaving little for repairs. Or, they consider putting less money down and use more of their available capital to fix the house up resulting in a larger monthly mortgage payment due to the low down payment. So, one use case for this loan product is to use it as leverage to buy a fixer upper with none of your own money, and use your money to fix it up.
Another strategy is to buy something that’s remodeled. Maybe you consider putting more of your own money down than the CalHFA’s 20% to enable you to buy a house you can see yourself in for a longer period of time. Use your money for a bigger down payment on a higher purchase price to reduce your loan amount on the first mortgage. Ideally you’re buying in a good location that you have confidence in, and the strategy here is to wait and ride out any market shifts.
You’ll have to give up some equity when you refinance or sell, but you ran your numbers, evaluated risk, and hopefully it was worth it because now you’re in the game. I hope this helps! I am very optimistic about this new program and I can’t wait to see how it helps our clients.