The lease-option path to home ownership can be a tough row to hoe in the Valley of Heart's Delight, but it can help you grow into your own home years from now—at today's prices.

"I have been a part of several other lease-option programs over the past 14 years, and when I talk to Realtors and clients about this one, they are truly amazed and excited," said Bill Alden, president of Network Financial Services in San Jose, the first mortgage broker in San Jose to offer the new program.

California Home Source Lease-Purchase isn't just for first-time home buyers or for those with top-notch credit. It can be a viable home-buying alternative for any savings-poor, but income-rich home buyer who makes it through the financially grueling lease.

The $48 million program, funded to assist some 200 home buyers in the San Francisco Bay Area, was designed by Freddie Mac. Administered by the Oakland-based Association of Bay Area Governments' Finance Authority for Nonprofit Corporations, Santa Clara County's version is available to qualified home buyers with household incomes that do not exceed $147,700.

Here's how the program works:

* Choose the home you want to buy—new or existing single-family detached home, condo, townhome or a manufactured home. permanently affixed to the land—for a maximum of $600,000.

* Home Source purchases the home, pays the closing costs, takes on the mortgage and leases the home back to you.

* You pay an upfront, nonrefundable administrative fee—1 percent of the purchase price of the home—and for 39 months, make monthly lease payments equal to the actual mortgage payment.

* You attend up to 12 hours of related counseling, maintain the home, and pay any home-warranty fees for repairs. If you have severe credit problems, you must obtain additional counseling assistance for an additional $200.

* At the end of the lease, you assume the remaining mortgage balance at no additional cost. Assume the loan earlier for an early-assumption penalty based on the number of days remaining on the lease period.

The monthly payments are an opportunity to experience making a real mortgage payment, but the experience is an eye-opener.

A program mortgage for $333,700 or less comes with a "silent second" loan for 3 percent of the purchase amount at a 5 percent simple-interest rate.

"The payment [on the silent second] is deferred until the home is sold or the mortgage refinanced," said Matt Callahan, program administrator at California Home Source.

It's the first mortgage that puts the dent in your wallet.

Currently, the first mortgage (on loans of $333,700 or less) for 97 percent of the home's purchase price is a 7/1 adjustable rate mortgage at 6.125 percent. A 7/1 ARM remains fixed for seven years and then adjusts once a year each year thereafter. For larger, so-called "jumbo loans" of up to $600,000, a 100 percent loan is financed with the same 7/1 ARM.

The rate is about 2 percentage points higher than the going rate for conventional 7/1 ARMs, but it is a bargain for those who might otherwise not be able to land a loan.

"It's close to an 'A' rate for clients who have 'C' or 'D' credit profiles. It's better than subprime," said Callahan.

Still, the monthly payment is $2,461 a month for 39 months for a $300,000 loan and $5,071 a month for the maximum $600,000 loan. The amount includes principle, interest, taxes, insurance (PITI) and private mortgage insurance (PMI).

"It's 100 percent financing, and that's risky business. The money you are paying at first, you don't get to write it off as interest, so it gets to be fairly expensive interest," said Ray Brown, San Francisco broker and co-author of Mortgages For Dummies (John P. Wiley, $16.99).

You must also find a seller or real estate agent willing to part with a matching administrative fee of 1 percent, an amount that can reduce the commission or proceeds from the sale.

"The program requires a 2 percent administrative fee. We can get one from the buyer. Sellers are willing to do that if they are netting the amount they want. It's up to the real estate agent to creatively present it as not a burden on the seller, but it's not unusual for the seller to contribute something back to the purchase price," said Callahan.

But in most sellers' markets, sellers want all they can earn from the sale of their home, especially if they've maxed out their equity with mortgage debt as high as the value of their home.

"Lease options are very rare in hot markets like Silicon Valley, especially when there are multiple offers. They work better in slow markets where the seller would basically make a sacrifice," said Janet Houde, an independent real estate broker in San Jose and president of the Santa Clara County Association of Realtors.

Callahan said some 200 program participants are out shopping for a home, but only 11 loans have closed since the program began six months ago.

It's not likely the housing market will crumble, but if prices are depressed at the end of the 39-month program period, and you opt to assume the mortgage, you could get stuck with a home priced higher than current prices.

If, for whatever reason, you decide not to assume the mortgage, you lose all the money you've paid into the program. That's nearly $100,000 on a $300,000 mortgage over 39 months.

California Home Source Lease-Purchase details are available at http://www.calhomesource.org/.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for
Saratoga News.