Raising the down payment needed to get a mortgage can prove difficult for would-be homeowners. Though there are numerous state-run down payment assistant programs, they are not accessible to all. And that is why California legislators want to help you raise your down payment.
The state’s legislators are proposing the creation of a billion-dollar fund that will help first-time homebuyers raise the down payment in its entirety or an amount close to that. It’ll achieve this through shared equity.
What Is Shared Equity
Investopedia defines a shared equity mortgage as a contract that divides property ownership between a lender and borrower. The borrower must use the property used by the borrower. Each part gets a portion of the equity when the property is sold based on their equity contribution. Any losses incurred from the property are likewise split equally between the parties.
Offered by different lenders in the U.S., shared equity makes it so that the lenders are the ones that enjoy any tax advantages and any mortgage rate deductions. Programs such as these prove especially helpful in high-cost real estate markets.
How will This Shared Equity work?
The million-dollar fund will raise money by issuing a billion-dollar revenue bond for ten years. The budget for this initiative includes $50 million and $150 million for this year and the next to cover administrative costs and revenue bond interest payments.
Under this program, the Californian government aims to help at least 7,700 borrowers annually. The program, if approved, would start issuing interest-free second mortgage loans for up to 30% of the cost of a home. However, lawmakers anticipate most loans will only cover 17% of the price, requiring borrowers to contribute 3% of their funds or combine the loan with other first-time buyer programs.
When the house is sold or a larger mortgage is obtained through a cash-out refinance, the interest-free loans would be repaid into a state fund. For instance, according to Cal Matters, if the fund contributed 20% of the home’s purchase price, it would receive a 20% share of the home’s appreciation in addition to its initial investment.
The fund would be able to issue fresh loans for qualified participants thanks to the program’s reinvestment of those proceeds, even if prices had dramatically increased.
Why is this fund important?
California has the second lowest homeownership rate in the country, with only 44% of Californians in homeownership. In a high-cost housing market, it is especially difficult for first-time homebuyers to raise their down payment. The program will help bridge the gap, helping more and more people achieve their American dream of homeownership.
“The California Dream for All program will give more people the chance to break free from the cycle of renting, become the first in their families to own a home and make it possible for more people to set their children and grandchildren on a path to success. This can change people’s lives,” Senate President Pro Tem Toni Atkins (D-San Diego) said in a statement.
And since the program will mainly target low-income areas, people of color will greatly benefit. It will be a step closer to financially empowering people who have been for so many years been oppressed by housing policies. It is the hope of those that draft this program, that it will help people of color and low-income earners begin to build generational wealth.
“We cannot wait until more housing is built for these communities to begin to build the generational wealth that they were locked out of and deeply deserve,” said Micah Weinberg, chief executive of the nonprofit group California Forward, which oversaw the drafting of the proposal.
