Photograph by Kathy De La Torre

Home mortgage consultants like Neil Reid of Wells Fargo Bank offer 'junior mortgage' programs.

New loan programs help first-time buyers

By Broderick Perkins

Two new loan programs--a unique lease-option deal and a "junior mortgage" program--are designed to take some of the heat off many struggling first-time homebuyers in California and elsewhere. The cost of housing has skyrocketed in California during the past decade. The median price rose to $248,020 in September, a 13.4 percent increase over the $218,710 median for September 1999, according to the California Association of Realtors (C.A.R.) and real estate information partner Real Estate Solutions.

Home prices have more than doubled in the Golden State since the early 1990s. Of 345 communities surveyed in September, 306 revealed increases in median prices, as strong demand and short supplies continue to rock affordability.

Only three in 10 Californians can afford the state's median-priced home, compared to one in two nationwide, C.A.R. said.

In high-price areas, homebuyers have a particularly difficult time coming up with a sizable down payment.

To give more sticker-shocked buyers an opportunity to realize the American dream, Englewood, N.J.,-based First Financial Equities Inc., and other lenders have teamed up with Freddie Mac to offer a new spin on an old creative financing technique.

Through a lease-purchase program, eligible buyers who come up with 1 percent down can lease a home for 38 months and then assume the balance of the mortgage payments, or decline the purchase. The lease payment is based on the true monthly cost of the mortgage, plus an administration fee.

Participating communities use municipal bonds to subsidize an additional 3 percent down of all closing costs for qualified first-time homebuyers with household incomes between $35,000 and $77,500. The maximum loan now is $252,700. With an existing fixed rate of 8.25 percent, monthly payments (principal and interest) are approximately $1,943 for the maximum loan. Qualified participants are not required to pay private mortgage insurance, but the additional nominal administrative fee is added onto the monthly payment.

Available in 40 California cities and soon to be released nationwide, the loan could be cheaper, based on market rates when the program launches in a given city.

The 1 percent down payment is considered a participation fee (much as a security deposit for a rental contract) the potential homebuyer will forfeit if he or she decides not to assume the mortgage at the end of 38 months.

"We've also relaxed credit requirements," said David Siegel, program manager, First Financial Equities Inc. "This program is available for people who wouldn't be able to come up with a down payment. If they were to go out and get a comparable mortgage, they would have to get a much higher rate," Siegel added.

The new California Homebuyer's Downpayment Assistance Program (CHDAP) is a "junior mortgage" loan with a 3 percent per annum interest rate that can be used as a down payment with other low interest first mortgages offered by the state.

Some 10,000 first-time buyers, with incomes ranging from $44,400 to $104,000 for a family of four, are expected to benefit from the program.

The CHDAP is a deferred payment junior loan with a term not to exceed the term of the first loan. For example, if the first mortgage has a term of 30-years, then the CHDAP junior loan's term would be the same with no payments due until the end of the term. Repayment of the entire principal and interest of the loan is due at the end of the term of the loan, when the home is sold, or the first mortgage is refinanced or paid off. Homebuyers can prepay the junior mortgage without penalty.

The CHDAP can also be combined with other down payment assistance programs from the California Housing Financing Agency with first mortgage rates from 5 percent to 7.5 percent, depending upon the loan program and location. Home purchase price limits also vary by program and location.

For more information on lease-option programs, call 888.567.8060, or visit First Financial's BlueLoan.com website. For information on junior mortgages, call 800.323.8718, or visit the California Housing Financing Agency's website at www.chfa.ca.gov for a listing of CHFA-approved lenders in your area.

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Article reprinted with permission from Realty Times, Oct 27, 2000.

Broderick Perkins, executive editor of San Jose-based, DeadlineNews.com, is also a real estate writer and columnist for RealtyTimes.com.

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