When the California Housing Finance Agency offered interest-free, no-monthly-payment loans last spring to help low-income residents with a down payment and fees to buy their first home, the entire budget of about $300 million was eaten up. In just 11 days.
Lawmakers then directed an additional $225 million to the program during state budget negotiations last year, and CalHFA aims to award those funds this spring. But there won’t be a mad rush for money this time — instead of distributing loans on a first-come, first-served basis, the state will select qualified applicants by lottery.
The program has also tightened its requirements, requiring applicants not only to be non-homeowners, but also to have parents who are not current homeowners. The goal here is to focus the program more tightly on Californians who need the state’s assistance most.
About 2,100 of the loans were made before the money ran out last April, according to Eric Johnson, a CalHFA spokesman. Since then, home sales in California have declined as interest rates have risen above 7%.
California Dream for All Shared Appreciation Loans is limited to covering the down payment and closing costs on the first home, up to a maximum of $150,000 or 20% of the home’s purchase price, whichever is smaller. They are treated as second mortgages, but do not require any payments of any kind until the home is refinanced or resold or the first mortgage is paid off, at which point the state loan must be repaid in full.
What makes the loans unusual — and attractive — is that they don’t accrue interest. Instead, their value increases over time with the value of the home. When the Dream for All loan comes due, the borrower repays the principal plus a percentage of the increase in the value of the home that corresponds to the percentage of the purchase price covered by the loan. If the value of the home does not increase, nothing will be added to everyone’s dream loan.
For example, if the Dream Loan for All covers 18% of the purchase price and the borrower sells the home for $100,000 more than they paid for it, the borrower will have to repay the Dream Loan for All plus 18% of $100,000, or $18,000. . Borrowers whose income is 80% or less of the area median income get an extra break, and pay a smaller percentage of the increase in value.
Aspiring homeowners can’t apply for loans yet, but they can work with participating lenders on the paperwork needed to get one. The program will begin accepting online applications in April, Johnson said.
Who can get everyone’s dream loan?
To meet the definition of a first-time homeowner, the borrower must not have owned a home equity in the United States within the past seven years. Also, their parents may not currently own a share in the home. If the parents are deceased, they likely did not own a home at the time of their death. The program is also open to any Californian “who has ever been placed in foster care or institutional care,” CalHFA says in the program guide.
If there is more than one buyer, at least one must be a current California resident, and at least one must be a first-generation homebuyer. Borrowers must also be U.S. citizens or non-citizens authorized to be in the country, and must make the home they purchase their primary residence within 60 days after purchasing it.
The maximum annual income for eligible borrowers is 120% of the area median income, which varies from county to county. For example, the amount is $155,000 for borrowers in Los Angeles County, $202,000 in Orange County and $195,000 in Ventura County.
How can you apply?
The first step is to work with one of the lenders participating in the program to obtain a pre-qualification letter, Johnson said. The lender’s role is to make sure you qualify for the Dream for All program, not necessarily for a loan. However, before issuing a letter, the lender will check your credit report and debt-to-income ratio to determine how much loan you can afford, so your financial health will be a factor.
You can find a list of lenders participating in the Dream for All program on the CalHFA website.
Johnson said the state will open an online portal in the first week of April for applicants to submit their prequalification letters. One reason to give the public a few months to prepare before applying is to allow people time to improve their credit scores or take other steps needed to obtain a pre-qualification letter, he said.
How will applicants be selected?
CalHFA will accept pre-qualification letters for about a month, and they will all be treated equally no matter when they arrive during that period, Johnson said. After reviewing the letters to ensure applicants are qualified, the agency will conduct a lottery to select borrowers who will receive vouchers for Dream Loans for All.
The total budget of the program is sufficient for about 1,670 loans worth $150,000. Many borrowers will receive smaller amounts, so the program expects to support between 1,700 and 2,000 loans, Johnson said.
What happens after you get the voucher?
Getting approved for everyone’s dream loan doesn’t mean you’ll be able to buy a home. You still have to find one for sale that you can afford, convince the owner to choose your offer, and then qualify for a mortgage loan from a bank, credit union, or other lender.
With a coupon in hand, you’ll be able to make a larger down payment, which translates into lower monthly mortgage payments.