What is it?
The California Dream for All Down Payment Assistance Program is a state-funded program designed to help prospective homebuyers with low to moderate income levels purchase a home by assisting with their down payment and closing costs. The program aims to increase homeownership opportunities for individuals and families needing more financial resources to make a down payment on a home.
The program provides qualified borrowers up to 20% of the home’s purchase price as a down payment assistance loan. This second mortgage loan does not require monthly payments or accruing interest. The loan is paid back when the borrower sells the home or refinances. California has structured this arrangement as an equity share based on the home’s future appreciation.
To be eligible for the California Dream for All Down Payment Assistance Program, borrowers must meet certain income and credit requirements and purchase a home in California. Additionally, borrowers must complete a homebuyer education course and have a minimum credit score of 660 (though 680 is typically needed). Click here for more specific information.
Benefits
- No Down Payment – This program allows you to borrow 100% of the purchase price. You would need money for closing costs (about 4-5% of the purchase price) unless you work out a credit from the seller/agents to help.
- Lower payments – The most significant benefit a buyer would receive is reduced monthly payments. If the purchase price remains the same, you will owe interest on only 80% of the purchase price.
- Expanded purchase power – Since there are no payments on 20% of the purchase price and no mortgage insurance, a buyer would have roughly 25-30% more purchase power.
- No City/County restrictions – the program is available throughout CA.
Drawbacks
- Sharing equity – One of the primary benefits of buying a home is future appreciation. Sharing that waters down the benefit. It should be compared to what it would cost you otherwise. To do that, you need to know the effective interest rate on a loan equals the appreciation rate of the property. In CA, the 10 year average appreciation rate is 8.53%. For example, a home bought for $500K would receive a $100K CalHFA loan. If that home goes up to $750,000 in 7 years, the payoff for the loan would be $150,000. That is the same interest paid on a 30 year loan at a 9.0% rate.
- Competitive market – This program requires cooperation from the seller. It would require a seller to accept a low down payment loan, a more extended escrow transaction timeline (45-60 days), and potentially provide credit for costs. This is simply unrealistic in many parts of the State.
- Low availability of funds – The program has only been funded with $300M. If the average loan amount obtained is $100,000, only 3,000 Californians can access the program. Once the money is gone, it is over; even if you are in a contract to buy a home, it cannot close!!
Overall, the California Dream for All Down Payment Assistance Program is a valuable resource for individuals and families seeking to achieve the dream of homeownership but may need more funds for a down payment. Homeownership is an essential path to wealth. In that sense, some equity appreciation is better than none.
It is exciting to talk about a new program like this- especially one in the news and promoted by lenders. This program is the best of all DPA programs. Like other assistance programs, the drawbacks are not worth the benefits. A standard loan with 3.0% or 5.0% down is still the best option for most clients with nominal means. It is better not to take from your future to have cheaper payments today unless it is your last option.
Let’s talk about your homeownership dreams. Hurry, and contact us today!