Down Payment Assistance programs are, however, sometimes absolutely necessary for borrowers who cannot access enough cash to buy a home.
One of the best programs for borrowers with limited cash is CalHFA, sometimes referred to “calhaffa” in phonetic terms.
There are many variants of the program but I am going to explain it in very general terms only.
CalHFA Offers Two Second Mortgages – One for Down Payment, and One for Closing Costs
CalHFA helps buyers with limited cash by offering two second mortgages to cover down payments and closing costs.
The seconds are “silent,” meaning that there are no monthly payments.
The “Zip Second” covers up to 4% of the loan amount for closing costs.
The “My Home Second” covers 3.5% of the purchase price for a down payment and closing costs (if down payment is less than 3.5%).
The second mortgages can go behind a 3% down conventional loan, a 3.5% down FHA loan or even a VA loan.
CALfha’s income cap is as high as $192,800, which is very high for a Down Payment Assistance program.
Here is an example of how the program could work for a 3% down, $400,000 purchase with $22,000 of closing costs (explained below).
If the above scenario was an FHA transaction, the “Necessary Funds” from the buyer would be about $6,500 (or about $2,000 higher).
For buyers with limited cash, CalHFA is clearly a wonderful opportunity.
But – here are some of CalHFA’s limitations:
1. High Fees/Closing Costs: There are no “no points” loan options. All CalHFA loans require up to 3 points of origination fees. The “closing costs” in the above example include 3 points of origination fees, as well as impounds, recurring and non-recurring closing costs.
2. High Rates: The first mortgages have to be obtained through the designated CalHFA investor and the rates are much higher than those for standard FHA, conventional and VA loans.
3. Slower Closing Periods: We need 25 days to close these loans (as opposed to 14 days for FHA and Conventional loans without down payment assistance).
4. Max First Mortgage is effectively $453,100 because additional fees for higher loan amounts make them untenable.
CAVEAT: The above explanation and scenario is overly simplified with many details omitted. For more detailed information, please contact our experts at [email protected] or schedule a call with one of our mortgage experts here.
