S.F. program helps with down payment
As Bay Area home prices soar, coming up with a 20 percent down payment can feel like walking up the down escalator.
Wannabe buyers who don’t have parents to help out have several options. They can borrow more than 80 percent of the purchase price with a first mortgage and pay private mortgage insurance. They can borrow some of the down payment with a home equity loan or line of credit.
Or they can go with a lesserknown option: giving up part of their future appreciation in exchange for down payment help from a government or private-sector program.
San Francisco’s Down Payment Assistance Program for market-rate homes is an example of government aid. First-time buyers can get up to $375,000 toward a home or condo in the city, but funds are limited and there are income restrictions. The application deadline this year is Aug. 21.
Unison, formerly known as First Rex, offers a privatesector alternative. There are no income restrictions and buyers don’t have to be first-timers, but they must live in the home, qualify for a loan and be in one of the 12 states (including Califorina) where Unison operates.
In a typical Unison HomeBuyer deal, the buyer puts down 10 percent of the purchase price, gets 10 percent down from Unison and borrows 80 percent with a first
mortgage, thereby avoiding private mortgage insurance. In exchange, Unison shares in 35 percent of any future appreciation or depreciation.
The homeowner pays nothing to Unison until they sell the home, except for a setup fee equal to 2.5 percent of the down payment received. When they sell, they owe Unison the original investment plus 35 percent of any appreciation or minus 35 percent of any decrease in value.
The homeowner also has the option of buying out Unison any time after three years under the same terms. The home’s value would be determined by an independent appraiser.
Because Unison’s investment is not a loan, homeowners don’t get a tax deduction for the shared appreciation payment, like they could for mortgage interest.
The deal can make sense for buyers who think home prices are nearing a peak and don’t have a 20 percent down payment or have it but don’t want to sink it all into a home, said Scott Whitlock, sales manager with First California Mortgage in Napa. Whitlock has closed four deals with Unison.
One was for Shannon Ross and Daniel Krill, who bought their first home in May after their landlord decided to sell the home they had rented for 14 years.
Unison “matched our down payment, which made our payments a bit lower” and allowed the couple to put more into a college fund for their teenage daughter, Ross said.
The couple paid $335,000 for a home in Vallejo. They got 10 percent or $33,5000 from Unison, put down $33,500 of their own and borrowed 80 percent.
Their monthly principal and interest payment is $1,358. (Their setup fee was 2.5 percent of $33,500 or $838.)
Had they put down 10 percent and borrowed 90 percent, their payment would have been $1,608 including private mortgage insurance, which is required when the loanto-value ratio on a first mortgage exceeds 80 percent. So they’re saving $250 a month by having a smaller loan and no mortgage insurance.
Another option for buyers is to borrow 80 percent of the purchase price, thereby avoiding mortgage insurance, put down 10 percent and borrow 10 percent with a second mortgage, often called a “piggyback.” Ross did not seriously consider that option because piggyback loans are usually adjustable rate, interest-only for the first 10 years then payable in full. Ross was not comfortable with those terms.
When the couple sells the house, they will owe Unison its original investment plus or minus 35 percent of the difference between what the house is worth at that time and the purchase price of $335,000.
Suppose it appreciates by 12 percent or about $40,000 after four years. They would owe Unison 35 percent of $40,000 — or $14,000 — plus the original $33,500. Meanwhile they have saved $3,000 a year for four years or $12,000.
However, if the value goes down by $40,000, they would owe Unison $33,500 minus $14,000, or just $19,500.
Giving up some appreciation “didn’t bother us,” Ross said. “In three years, we can revisit it if we want to. If it depreciates, we both take losses. It seems fair.”
For people short on cash, this could be a great deal, said financial planner Norman Boone, president of Mosaic Financial Partners. Even if they give up more appreciation than they saved, the flexibility of having lower monthly payments is worth it for some owners.
“The timing may be really good for this,” Boone added, because it’s unlikely that home prices will continue appreciating at their recent pace.
Unison first started investing in homes about 11 years ago. “Two years after, there was a financial crisis,” said Unison Co-CEO Thomas Sponholtz. The company stopped investing for four or five years, then started again about three years ago.
The number of homes it has invested in “is approaching 1,000,” Sponholtz said. The average purchase price is around $900,000.
Buyers must have a minimum FICO score of 680 and get a prime mortgage from one of nine lenders that work with Unison. A year ago, Unison got permission to offer its program on loans backed by Freddie Mac. The Unison investment is entered into Freddie’s underwriting software as a gift, Whitlock said.
Unison also offers a shared appreciation program for existing homeowners who want to cash out some of their equity, but the repayment terms are different.
Unison gets money to invest from pension funds and other institutions with long time horizons because homeowners could use the money for up to 30 years, although the average lifespan of a deal is eight years.
“We are partnering with the homeowners by investing alongside them in the house,” Unison Co-CEO Jim Riccitelli said. The company does not go on title as an owner; it typically has a second lien behind the first mortgage.
If the owner makes an improvement that increases the value of the home, “we have an adjustment for that” when the investment is repaid, Riccitelli said.
The company will invest in single-family homes and condos, but not tenancies-in-common or cooperatives.
Pamela Simmons, a real estate lawyer who represents homeowners, considers the Unison deal “a loan in disguise” with a potentially high implicit interest rate. The investors “don’t have to pay property tax, do upkeep, and they are getting 35 percent. That’s a lot of money,” she said.
San Francisco’s program takes a smaller cut of the homeowner’s appreciation but does not reimburse any losses. It also has more strings attached.
Buyers can’t have owned a home in the past three years and can’t earn more than 175 percent of the area median income (or more than $161,450 for a two-person household).
They must attend eight hours of homeownership counseling and submit an application by Aug. 21. Everyone who applies by that date will be put in a lottery. Winners generally must get into a contract on a market-rate home within 60 days.
Buyers must apply for a loan and borrow the most they qualify for with a 5 percent down payment. The program will make up the difference between that amount and the purchase price, up to $375,000, in the form of a no-interest, no-monthly payment 30-year loan.
The loan, often called a “sleeping second,” is payable when the homeowner sells, refinances or rents the house or decides to pay the city back. At that point, the homeowner must repay the original loan amount plus an “equitable share” of any appreciation.
If the city provided 15 percent of the purchase price, the equitable share would be 15 percent of the appreciation. The portion of the loan repayment that represents appreciation is treated as mortgage interest and is tax deductible, the city says.
If the house has fallen in value, the owner still must repay the original amount borrowed; there is no deduction for the depreciation.
The city has made about 450 such loans since 1998. About 150 have been repaid. This year it has funds to make 26 loans if everyone borrows the maximum $375,000, more if they borrow less. Three of the loans are reserved for police, firefighters and other emergency workers and three for publicschool teachers.
Some other Bay Area cities also have assistance programs for low-income and first-time buyers.