Our team has become well-versed with the new California Dream For All Loan program and has it available to offer to our first-time home buyer clients. Lets unpack a common example and see how this program functions.
Assume someone buys a home for $500,000. They would obtain a traditional 30-year fixed loan at a fair market interest rate for 80% of the purchase price, making the loan $400,000. Now instead of making a $100,000 down payment, something most first-time home buyers don’t have, they obtain a 2nd mortgage from the state of California for the needed $100,000. No monthly payments are required and no interest accrues on this $100,000 2nd mortgage. But it is not a grant; it is not free money. This 2nd mortgage is a Shared Appreciation Loan, meaning that when the home buyer goes to sell the property they have to pay back the loan in full AND share in the gained equity with the state of California.
Lets see how those numbers work. Lets assume this $500,000 home appreciates by a modest 5% per year. After 5 years, the home is now worth $640,000; it has appreciated by $140,000. Most folks utilizing this program will need to pay back 20% of that appreciation to the state, in this case $28,000 dollars. So when they sell the home, they will pay $128K to the Dream For All mortgage, the outstanding balance of the 1st mortgage that started at $400,000, leaving them with $142,000 in equity before selling costs.
So, in a nutshell, a borrower who put in nothing for a down payment ends up earning nearly $150,000 in realized equity. And to do so, they had to pay $28,000 in shared appreciation to borrow a $100,000 loan, which essentially works out to be an annualized interest rate of 6%.
Here’s another example created by CalHFA worth watching:
Like any loan program, there are qualifying restrictions. Contact my team and I for the full details on how first-time buyers can take advantage of this new loan!
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