California’s Dream for All Loan Program Renewed

California’s Dream for All Program, which helped many first-time homebuyers last year, will be renewed for 2024 with some changes. Many prospective homebuyers in California have deferred their dream of owning their own home or given up on it altogether. And this program could allow them to accelerate or rethink their plans. Does it make economic sense? That’s where I come in: Before you talk to a lender, a realtor, or consider programs like this, run the buy-vs.-rent numbers with a Certified Financial Planner like me. I’m not a lender or realtor so I can provide an impartial perspective.

What Is the Dream for All Shared Appreciation Loan?

Qualifying California homebuyers (who are both first-time homebuyers and first-generation homebuyers according to new rules) may receive up to a 20% down payment in the form of a subordinate shared appreciation loan from the state. There’s no interest charged; however, at payback, you owe California a proportional share of the home appreciation in addition to the principal. Effectively, California is a silent equity partner in your purchase of a home. In most cases, you don’t have to pay the appreciation loan back until you sell or you pay off the primary mortgage.

Here’s a link to the program’s website.

Shared Appreciation Loan Example

How Do You Qualify?

All borrowers legally reside in the US, will be first-time homebuyers, and can be approved for a CalHFA loan below the borrowing limit
At least one borrower is a California resident and a first-generation homebuyer
Take an 8-hour homebuyer education course for $99
Participate in a one-on-one homebuyer counseling session with a HUD-approved agency
Have income below the CalHFA Dream for All income limits determined by the county in which you intend to purchase a property

Hesperian Tip

Couples with combined income above the limit may still qualify. A single eligible spouse can go through the program and purchase a house alone in order to qualify. The catch? That single spouse’s income would have to meet all the requirements by itself. Still, this loophole broadens program eligibility to a large number of even higher-income households.

Why Is the Dream for All Program Advantageous?

If you don’t have much money (if any) for a down payment, this program could provide this upfront investment at potentially a very low cost. You can think of the “interest” on the shared appreciation loan as being the annual appreciation of your home. Since home prices are unlikely to rise by anywhere close to today’s mortgage rates over any reasonable long-term period, it’s an attractive offer. At least 20% of your loan would most likely end up having a lower effective rate, and the interest is deferred so you won’t owe anything for most of the time you own your home.

In addition, you can still put up as much as 10% of your own money (I’d recommend putting up as much as you can), lowering the primary loan amount to as low as 70% of the home’s value.

All this can lower your mortgage payment thereby increasing the likelihood you can comfortably afford a home purchase now, despite high mortgage rates. We’d assess that in our planning sessions together because it greatly depends on the home you buy and your personal financial situation.

Other Advantages

The shared appreciation loan offers an interesting, albeit limited, hedge against home price declines and higher interest rates. If home prices stagnate or fall between your purchase and payback (usually when you sell or pay off the primary mortgage), then the effective interest rate will turn out to have been 0%!

Furthermore, the shared appreciation component is capped at 2.5x the loan amount. Over a 30-year period (after which your primary loan is fully amortized and you must then pay off the shared appreciation loan), the maximum effective interest rate would end up being only around 4.26%—very attractive compared to today’s 6%-7% mortgage rates.

Now the Cons or Considerations to Think Through

Even if you qualify, home prices are not attractive in California right now. So go into this process with eyes wide open: The Dream for All Program is very interesting, but you may still be buying an overpriced property that could decline in value in the future. The longer you plan to stay in your home, the less this matters to you, though.
The primary mortgage must be a CalHFA loan, which may have different terms or less attractive rates than other types of mortgages for which you may qualify.
You can only refinance the primary loan one time and only if very careful rules are followed. We can work with your CalHFA lender when it comes to that, but because of the one-time refi chance, you’ll want to wait until interest rates have fallen a lot (if they ever do) to make the most of your one shot at lowering your mortgage rate.
It’s possible, however unlikely, that home prices go on a tear just after you make your purchase and you sell in the short to medium term, so you end up paying more on the shared appreciation loan than you would have through a conventional mortgage. Given how expensive homes are still and how poor affordability is, the probability that your home appreciates by more than current mortgage rates seems low, but you never know. Even if this does occur, your solace will be that your equity has also appreciated a lot.

The Dream for All program faced problems in 2023. It ran out of money while participants were still trying to close on their homes, leaving some scrambling for alternative funding to save their deals. To prevent this, for the 2024 round funds will be disbursed through a lottery. Details are still forthcoming, but the application/voucher portal is set to open in April. Hopefully, this solves things, but this means qualified applicants are still not guaranteed to receive funding. Furthermore, California wants funds disbursed more evenly across the state, so regional caps may be put in place.

Even though the program will launch in the Spring, you’ll want to know well before then whether you should even apply. This is why I’ve been writing about this lately and have reached out early to clients and prospects for whom this program may be relevant. My recommendation is to complete the personal financial analysis with me as your financial planner sooner rather than later. That way, when the Dream for All program opens you can apply and see if you get selected. And in case you don’t, we’ll have prepared a Plan B. To learn more, reach out for a free consultation through the link below:

Eric R. Figueroa, CFP®

I am a Folsom, CA, fee-only wealth manager serving the Greater Sacramento area, California Gold Country, and the nation virtually. I offer financial planning and investment management, specializing in impact investing and personalized values-based investing.

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