Forgivable Equity Builder Loan: California’s New Program for First-Time Homebuyers

For many first-time homebuyers, coming up with a down payment is the biggest hurdle to purchasing a home To make homeownership more accessible, California recently launched the Forgivable Equity Builder Loan program. This innovative new initiative provides eligible borrowers with a low or no interest subordinate loan that can cover up to 10% of the purchase price Even better, the loan is entirely forgivable after 5 years of continuous owner-occupancy.

Keep reading to learn more about how the Forgivable Equity Builder Loan works and find out if you may qualify for this exciting new source of down payment assistance.

Overview of the Forgivable Equity Builder Loan

The Forgivable Equity Builder Loan program is administered by the California Housing Finance Agency (CalHFA). It offers the following key features

• Up to 10% of the purchase price provided as a subordinate loan for down payment/closing costs
• 0% interest
• Loan is forgiven 20% annually if borrower occupies for 5 years
• Can be combined with CalHFA first mortgages and other programs
• Available to first-time homebuyers meeting income limits

This subordinate loan is intended to help first-time buyers overcome one of the biggest barriers to homeownership – saving enough for a down payment and closing costs.

By providing new buyers instant equity of up to 10% of the sales price, the Forgivable Equity Builder Loan also helps borrowers build wealth and stability right away.

Who Qualifies for the Forgivable Equity Builder Loan?

To qualify for this forgivable down payment assistance loan, borrowers must meet the following eligibility criteria:

First-Time Homebuyer

You must be a first-time homebuyer, defined as someone who has not owned and resided in their own home in the past 3 years. Exceptions are made for borrowers purchasing with CalHFA’s HUD 184 Native American Home Loan or FHA 203(h) disaster victim programs.

Income Limits

Your total annual household income must be at or below 80% of the area median income based on the property location and family size. CalHFA uses automated underwriting systems to verify borrower income.

Homebuyer Education

All borrowers must complete a homebuyer education course through a CalHFA-approved counseling agency.

Credit/Loan Qualification

In addition to CalHFA requirements, you must meet all credit, income, and loan qualifications of the lender, loan servicer, and mortgage insurer/guarantor. Minimum credit scores and debt-to-income ratios apply.

Owner-Occupancy

You must occupy the home as your primary residence within 60 days of closing and continue to live there for a minimum of 5 years. Non-owner occupants and non-occupant co-borrowers are not permitted.

How the Forgiveness Component Works

Here is a breakdown of how the equity builder loan forgiveness works:

• 0% interest rate and deferred payments for the life of the first mortgage (up to 30 years)
• 20% of the total loan amount is forgiven for every year you occupy the home as your primary residence
• After 5 years of continuous owner-occupancy, the loan is completely forgiven and your obligation is fulfilled
• If you sell or transfer title before 5 years, the remaining unforgiven balance becomes immediately due

By living in the home for just 5 years, you can completely eliminate this down payment assistance loan and its balance. The pro-rated annual forgiveness gives you a great incentive to remain in the home long term.

How to Apply for the Forgivable Equity Builder Loan

Since this is a new program as of 2022, options to apply are still limited but expanding quickly. Here are some key steps:

• Contact CalHFA directly or see their website for a list of approved lenders in your area
• Work with a CalHFA-approved lender to apply for a CalHFA first mortgage and Forgivable Equity Builder Loan together
• Lenders will guide you through documenting income, assets, and eligibility to find the ideal mortgage and down payment assistance combination for your situation
• Close on your affordable CalHFA first mortgage and subordinate Forgivable Equity Builder Loan together!

The program is open to eligible borrowers across California. You must work with a CalHFA-approved lender to access this forgivable down payment assistance.

Benefits of the Forgivable Equity Builder Loan

This innovative loan program provides the following powerful benefits:

Down payment assistance when you need it most – The biggest roadblock to homeownership is the down payment. This loan provides up to 10% of the purchase price to put toward down payment and closing costs.

Added home equity and stability – The loan provides immediate equity, allowing you to build wealth and stability right away.

Greater long-term affordability – With 20% annual forgiveness, this 0% interest loan is totally forgiven in 5 years if you remain in the home. This increases affordability over the long run.

Relaxed credit requirements – CalHFA offers more flexible credit standards than conventional loans, making it easier to qualify.

Low costs – There are no required monthly payments, and lenders can only charge a maximum $50 processing fee on top of standard closing costs.

Buy sooner than later – With home prices rapidly rising, this can help first-time buyers get into the market sooner before it becomes even more expensive.

Wealth building for the future – The added equity and forgiveness incentivizes you to remain in the home, building wealth and stability for years to come.

For eligible buyers, the Forgivable Equity Builder Loan can be an invaluable source of down payment help for breaking into homeownership sooner.

Is This Forgivable Loan Right for You?

While this exciting new program opens doors for many buyers, it won’t be the right fit for everyone. You should consider factors like:

• How long you plan to remain in the home. 5 years is needed for full forgiveness.

• Whether you can qualify for a CalHFA first mortgage based on your income, debts, and credit scores. Their requirements are more flexible than conventional loans but still apply.

• If you can find a CalHFA-approved lender in your area to originate the mortgage and forgivable loan together. Ask lenders if they participate.

• How this subordinate loan may impact your long-term mortgage exit strategy upon selling or refinancing.

Think about your unique homebuying situation and discuss the pros and cons with a loan officer and real estate advisor. They can help determine if this forgivable equity builder down payment assistance program aligns with your homeownership goals and plans.

Will More Programs Like This Emerge?

California’s Forgivable Equity Builder Loan seeks to address an urgent problem – rising home prices that make big down payments impossible for many first-time buyers.

It’s likely we could see more creative down payment assistance programs like this emerge in California and beyond. States and local governments want to promote inclusive, affordable homeownership. Forgivable loans, grant programs, and sweat equity initiatives that help buyers overcome large down payment burdens could become more common.

In the meantime, California’s new initiative opens the door wider for first-time buyers to purchase now. Connect with a participating CalHFA lender to start the mortgage and loan application process and see if you’re eligible for this forgivable down payment assistance. With up to 10% of the purchase price covered, this loan can help first-time buyers clear the biggest obstacle to achieving their homeownership dreams.