California offers 3.5% down payment program for first-time homebuyers

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | October 15, 2024

Article originally posted in Orange County Register on October 10, 2024

A down-payment program is offering a whopper of an opportunity for first-time homebuyers in California.

My Home Down Payment Assistance from the California Housing Finance Agency features a “deferred-payment” loan for down payment and closing costs, covering much of a buyer’s out-of-pocket funds.

The down payment assistance or DPA can be as much as 3.5% of the sales price for homes purchased throughout California.

From July 1, 2023, to June 30, 2024, the state program secured more than 6,100 DPA loans, according to Eric Johnson, spokesperson at Cal HFA. Of those, 1,785 were founded in Orange, San Bernardino, Riverside, San Diego and Los Angeles counties.

Let’s run through the typical questions about the program.

Q: Does the DPA have to be paid back?

A: Yes, but it’s almost free money. Let me explain.

The down payment advance becomes a silent second mortgage against the home, accruing at a 1% interest rate. No payments are required. You must pay off the second lien when you refinance or sell your property. Or pay it off at the end of the 30-year term, assuming you have neither sold nor refinanced in the interim.

The closing cost assistance is called a ZIP Loan. It can be for either 2% or 3% of the loan amount. Here’s the catch: The interest rate on the first mortgage increases to pay for the ZIP Loan.

Applicants can look up details on registered lenders in order to apply for the program at the CalHFA website calhfa.ca.gov/homebuyer/programs

For example, today the conforming, conventional DPA has a rate of 6.375% on a 30-year fixed. If you add the 2% ZIP loan, the first mortgage rate becomes 7.375%. If you add a 3% ZIP, the rate becomes 7.875%.

The ZIP loan becomes a third trust deed against the property. Just like the second-lien DPA, the ZIP Loan is not forgiven. It must be paid back the same as the DPA. There is no accruing interest on the ZIP Loan, though.

Here’s a practical example: Let’s say you were buying a $750,000 home with 3% down from My Home. Let’s also say you were able to get the seller to cover closing costs. The down payment would be $22,500. The first trust deed (mortgage) is then $727,500. And of course we have the silent second to cover the DPA.

The principal and interest payment at a 6.375% 30-year fixed rate would be $4,539. Monthly property taxes at 1.1% are $687. Private mortgage insurance is $449 monthly. Let’s estimate homeowners insurance at $250 per month. The total payment is $5,925.

You are not required to use ZIP for closing costs. You can bring closing costs to the table yourself in the form of savings or a gift from say a relative. Or maybe get the seller to pay your closing costs. In fact, you can also contribute additional funds for the down payment if you’d like.

Q: Would a homeowner have to share a property appreciation with the state, like the California Dream for All requires?

A: No. Homeowners keep all property appreciation.

Q: Who qualifies as a first-time home buyer?

A: Any first-time homebuyer is defined as a borrower without ownership in any principal residence over the previous three years. This includes not residing in a home owned by a spouse in the previous three years.

Q: Are there household income limits to be able to qualify for this program?

A:  Yes. But not like the olden days when the income caps were so low in which borrowers could only qualify to buy a shoebox. Orange County has a household income cap of $255,000. In Los Angeles County, the cap is $194,000; Inland empire is $193,000 and San Diego County is $236,000.

Q: What is the maximum loan amount I can borrow?

A: The maximum loan amount for Orange County and Los Angeles County is $1,149,825. The maximum loan amount for the Inland Empire is $766,550, and for San Diego County it’s $1,006,250.

In all cases above, the minimum down payment is 3% up to a $766,550 loan amount. Over $766,550, a borrower would need either 3.5% down for FHA financing or would have to provide the difference of 2% needed for a conventional, high-balance mortgage down payment. (That’s from $766,550 to $1,148,825.)

Q: What kind of property can I purchase?

A: One unit, either a single-family residence, condo, townhouse, manufactured home or an accessory dwelling unit.

Q: When will the money run out?

A: It won’t. This is not bond-financing. Rather, it’s a completely self-supporting program in which revenues generated through the program are reinvested in the program for new borrowers.

Q: Who can qualify?

A: It’s only for occupying borrowers. So, it doesn’t work for investment property owners or non-occupying co-borrowers.

The conventional program requires a minimum middle FICO credit score of 680. For FHA borrowers, it is 640. You must provide two years of income documentation, including tax returns. If your FICO is 700 or higher, the maximum debt ratio compared to your income is 50%. For 699 and below, it’s a 45% maximum debt-to-income ratio. And yes, conventional PMI insurance or FHA mortgage insurance are required.

If your real estate agent is worried about effectively submitting a zero-down offer, there are plenty of home sellers who have accepted this DPA program. Plenty of sellers also accept zero-down VA buyers.

Freddie Mac rate news: The 30-year fixed rate averaged 6.32%, 20 basis points higher than last week. The 15-year fixed rate averaged 5.41%, 16 basis points higher than last week.

The Mortgage Bankers Association reported a 5.1% mortgage application decrease compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $642 more than this week’s payment of $4,755.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.375%, a 15-year conventional at 5.125%, a 30-year conventional at 5.875%, a 15-year conventional high balance at 6% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high-balance conventional at 6.25% and a jumbo 30-year fixed at 6.5%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego and Orange counties.

Eye-catcher loan program of the week: A 30-year mortgage, with 30% down locked for the first 5 years at 5.5 with 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. . His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.