State releases new Dream for All equity share program

CALHFA released the Dream for All down-payment assistance program this week and has $300 million to invest with first-time home buyers with incomes less than $215,000 per year and FICO scores above 680. I have read through all the guidelines and had a telephone briefing with our contact at CALHFA, and now feel like I have all the answers to my questions.

CALHFA has been our go-to source for first-time homebuyer down payment assistance for years, but this new equity-share program is the first of its kind and absolutely a dream come true for some buyers.

For my fellow skeptics, I want you all to know that unlike some of the crazy adjustable-rate loans done between 2003 and 2007 that allowed buyers to purchase a home for $800,000 without one penny out of their pocket and no proof of income, the Dream for All program is different. The Dream for All program requires a minimum FICO score of 660 for low income (80% of AMI) and 680 for income levels up to $215,000 in Solano County, along with an overall debt ratio no higher than 45% and a Fannie Mae desktop loan approval.

Here is a snapshot scenario of how it works and who it can help:

Let’s assume we have a schoolteacher and a nurse, and this 30-year-old couple makes $180,000 per year, renting at $3,500 per month with a couple kids, 700 FICO, $70,000 in student loan debt at $600 per month and no other debt, a whopping $20,000 in savings, a couple of small 401k plans and no gift funds available from family.

This equity-share program

Jim Porter

will allow them to buy a home for $800,000. The state will lend them $160,000 for the 20% down payment with a 20% shared appreciation agreement that requires the buyer to pay back the $160,000 plus 20% of the appreciation when they sell the house. The first mortgage loan, as of this week, would be a 30-year fixed-rate loan with no PMI at 6.375% with up to a 2% loan origination fee, which creates an estimated APR of 6.55%.

CALHFA told me that after 12 months, they will subordinate their second position once for the homeowner to refinance to a lower rate with no cash out and, because this is so new, further limitations may follow.

Back in the mid- to late-1980s, private equity-share investors became an option for buyersain the high-end coastal markets where wealthy investors would partner with high income young couples on houses in San Francisco, Marin and San Mateo. The investor would produce the 20% down and the kids would pay the mortgage and maintain the house with an agreement to sell the house in five to seven years and split the equity growth 50-50.

This California program will allow a buyer to live in the house for 30 years before any repayment is required. After the 30-year first mortgage loan is paid off, a balloon payment of this $160,000 plus 20% of the gross equity becomes due and payable.

Let’s assume the value of the house in 30 years is $1.4 million. The kids that are now 60, will have to pay the original $160,000 plus 20% of the $600,000 in equity via a loan or by selling the house and pay $280,000 to the state of California. The equity share partner will not be responsible for 20% of the plumbing bill or any of the other repairs and home improvements made over the 30 years. Another thing to consider is that if the buyer sells the house in a few years, the state will get 20% of the gross equity and not have to participate in any of the selling costs for commissions, repairs and closing costs. The best way to view this program and this $800,000 scenario is to see it as a loan for $160,000 with an equity share agreement in lieu of traditional guaranteed interest payments.

I predict the $300 million will be sold out in less than six months, so have your kids investigate this ASAP or, better yet, call me and I will show you how you can lend your kids the $160,000 for the down payment because I am sure they would prefer to be equity share partners with you.

This is a no-brainer program that will make homes more affordable for thousands of first-time home buyers that are willing to partner with California. The total payment for the nurse and teacher above would be $4,940 per month including property taxes and homeowners’ insurance, assuming the property tax rate is 1.25% annually and the home is not in a fire or flood zone.

Jim Porter, NMLS No. 276412, is the branch manager and senior loan adviser of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protec- tion and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.