Down payment and closing-cost requirements often keep otherwise qualified first-time buyers from purchasing a home. The California Housing Finance Agency helps low- to moderate-income borrowers who meet certain criteria qualify for closing-cost or down payment help. It works with participating nonprofits and government agencies throughout the state to underwrite and fund small secondary loans for the California Homebuyer's Downpayment Assistance Program (CHDAP). Based on the primary mortgage, a CHDAP loan covers the down payment or closing costs.
A CHDAP second loan equals up to 3 percent of the sale price and may be applied to the down payment or closing costs. As a down payment, it is based on the lesser of the home price or appraised value. When used with conventional financing by a bank or mortgage-lending institution where the down payment requirement is at least 5 percent, the buyer must cover the remaining down payment funds and closing costs. For example, a typical scenario involves a borrower who pays 2 percent down (5 percent minus 3 percent CHDAP) out of pocket and covers his own closing fees.
The Federal Housing Administration insures loans made by approved lenders and pays claims if borrowers default. A buyer can use a CHDAP loan to cover up to 3 percent of the required 3.5 percent down payment. Most FHA lenders require a minimum credit score of 640 to qualify. The California Housing Finance Agency also requires a 640 score for the secondary financing. Under FHA guidelines, borrowers with less than a 580 score may qualify with certain lenders and a higher down payment. Such borrowers, however, can't use CHDAP assistance due to its credit requirement.
When used in conjunction with a no-down-payment loan such as a Veterans Affairs (VA) -guaranteed mortgage, the CHDAP loan covers closing costs. The VA backs loans made to service members, veterans and eligible surviving spouses. It promises to repay a portion of the mortgage in the event of default, allowing lenders to make loans with no down payment required. A VA borrower can use a CHDAP loan to cover his closing costs up to 3 percent of the sale price. In California, closing costs on a $200,000 home average $3,854, approximately 2 percent of the sale price. A VA borrower must pay a funding fee at closing which equals 2.15 percent of the sale price. The CHDAP loan may be used to cover the funding fee plus VA-allowable costs. Most VA borrowers, however, finance the funding fee into the new loan amount.
Homes in certain rural areas of California qualify for a no down payment loan from the Department of Agriculture (see Resource 5). Such towns have a population of 25,000 or less, are not adjacent to a large city or part of a continuous urban area, according to the USDA. The loans are open to the public and restrict the loan amount based on income limits which vary by location and household size. The CHDAP loan can cover all closing costs up to 3 percent of the sale price. Only approved lenders may participate in the USDA and CHDAP loan programs.(see Resource 6)
- California Housing Finance Agency: California Homebuyer's Downpayment Assistance Program (CHDAP)
- California Housing Finance Agency: Income and Sale Price Limits
- California Housing Finance Agency: CHDAP Income Limits: Use with VA, USDA or Conventional Firsts
- Bankrate.com: Four Mortgages That Require Little Money Down
- 2013 VA Loan Guidelines: 2013 VA Loan Funding Fees
- CALHFA: Bulletin 2011-15: Changes to Minimum Credit Score Requirement for CalHFA FHA Loan Program
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.