Low-Down-Payment Loans

When it comes to home loans, many lenders offer special programs for those who have never owned a home or who haven’t owned one for years. By offering loans with little or no down payment, lenders support people who can afford the monthly expenses of home ownership, but who have struggled to save significant cash reserves for a down payment or other costs associated with closing an escrow.

One such program is the California Dream for All program, which uses a shared appreciation model. This model is one where the investor (or lender) and the borrower share in the reward; that is, they share financial benefits from any appreciation in the value of the property. For an opportunity to benefit from the property’s appreciation, the investor/lender offers favorable loan terms. The first round of this program was done in 2023. A second round is due to be released in early 2024 and the money will be allocated to qualified borrowers via a lottery system.

This is one of many programs intended to support people who may not benefit from the generational wealth that makes home ownership possible. I asked my friend Ginny Richards, a senior loan officer for Kind Lending here in town, to share her expertise on loan programs that make it easier for first-time homebuyers to break into the housing market.

She started by telling me that there are not only programs that reduce or eliminate the down payment, but also programs that reduce or eliminate the need to come up with cash for closing costs. I must tell you that Ginny, being a careful and detail-oriented person, does not like speaking in generalities when it comes to lending. However, she is happy to enumerate the details of specific programs (and she is incredibly thorough when it comes to diving into the ocean of information required for her clients to qualify for specific home loan programs).

Here are some of the programs available to first-time homebuyers. Note: loan programs define “first-time homebuyers” differently. Some say the borrower can never have owned a home, while others say the borrower can’t have owned a primary residence in the last three years or ten years or whatever time frame they choose.

As soon as you start to learn about loan programs, you’ll notice it’s a big alphabet soup—there are so many acronyms. There’s the Federal Housing Administration (FHA), not to be confused with the Housing Finance Agency (HFA). And then, just for fun, there’s the Cal HFA FHA Program (I am not making this up).

With these types of loans, there are borrower requirements and property requirements.

Borrower requirements include things like minimum or maximum income, completing homebuyer counseling, and occupying the property as a primary residence (meaning, it cannot be used as a rental). Property requirements include things like it being a single-family home (which may or may not include guest houses, condos, or manufactured homes) and having it be move-in ready, as opposed to being a fixer-upper.

One program Ginny recommends to qualified clients has an income requirement where borrowers cannot make more than 80% of the median income for the county. In Mendocino County, our median income is $89,700, and 80% of that is $71,760. So, to qualify for the down payment assistance program and be able to afford a house, the loan would be about $349,200 on a house that costs about $360,000.

To be fair, this does assume that the borrower has perfect credit and no other debt, which is extremely unusual, but these numbers give you a sense of what’s possible.

Speaking of credit, if you want to buy a house someday, you’ll need to have a credit history, which means you need to borrow money and pay it back over time. If you always pay cash for everything, lenders don’t know if they can trust you to repay a loan.
I recommend getting a credit card and using it for certain expenses within your means, and then paying off the whole balance every month on time every time. And, keep the balance to about 25% of the full credit limit. So, if you have a credit card with a $4,000 limit, don’t charge more than $1,000. When you’re ready to apply for a home loan, stop using the credit card and just pay cash for a while.

Qualifying for a home loan is about layering risk, which means, considering all the financial puzzle pieces—income, debt, credit history, job security, and more. Lenders that provide first-time homebuyer loans with special terms want to be sure their loans are repaid, so they can be restrictive, but if you qualify and are willing to work with them, these special programs can be an avenue into home ownership.

The best way to find out what you qualify for is to call someone like Ginny who can go through all the particulars with you.

If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

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