HomeMy WebLinkAbout7.1 First Time Home Buyer
CITY CLERK
File # [EjGJ~[[]-[¡][Q]
AGENDA STATEMENT
JOINT CITY COUNCIL AND PLANING COMMISSION STUDY SESSION
MEETING DATE: December 13, 2005
SUBJECT:
Proposed First Time Homebuyer Loan Program
Report Prepared by: Julia Abdala, Housing Specialist
ATTACHMENTS:
1) State Housing and Community Development Department
Median Income Linùts and Calculations at 120%, 140%, 160%
and 180% Percent of Median Income.
2) Grid of First Time Homebuyer Programs in Other Cities
3) Most Common Private Home Loans and Implications for
Dublin's First Time Homcbuyer Loan Program
4) Summary of Issues Under Discussion at Study Session
5) Sample of First Mortgages for BMR Units in Dublin
RECOM~ENDA}ION:
ck '\'f~
1) Receive the Staff Report
2) Provide direction regarding issues related to the First Time
Homebuyer Loan Program
3) Direct Staff to return with a draft of a First Time Homcbuyer
Loan Program to the City Council
FINANCIAL STATEMENT:
There is no financial impact in discussing the various features that
could be incorporated into a First Time Homebuyer Loan Program.
DESCRIPTION:
The City Council has been interested in the development of a first time homebuyer program for several
years. The Housing Element adopted on June 3, 2003 contains a policy that the City should provide
opportunities for first-time homebuyers to purchase homes in Dublin (Policy 11). As a result of this
policy and the desire of the City Council to provide a range of housing opportunities, the City Council's
Goals and Objectives for 2005-2006 lists the Tmplementation of a First Time Homebuyer Loan Program
(FTHLP) as a high priority. In addition, the City of Dublin budget for 2005-2006 contains $500,000 for
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COPY TO: FTHLP Advisory Group
In-House Distribution
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ITEM NO.
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use in a First Time Homehuyer Loan Program. The Godbe Research Housing Needs Study completed in
July 2005 further validated the need for this type of assistance. This Study, presented to the City Council
on August 2, 2005, indicated that residents in Dublin believe that a program that; would provide financial
assistancc for first time homebuycrs would be valuable.
In order to develop an effective First Time Homebuycr Program, Staff has been researching existing
programs and lending opportunities:
. Staff has discussed First Timc Homebuyer Programs provided by other cities (Hayward, San
Leandro, Walnut Creck, Fremont, Concord, Livermore, Pleasanton and San Jose) with each
respective City Staff.
. Staff worked with a small group of lending professionals (Bank of America, Diablo Funding
Group, Irwin Home Equity, and DID Mortgage) to review and evaluate the various fcatures that
may be beneficial to incorporate into a Dublin First Time Homebuyer Loan Program (FTHLP)_
Also in this group were Housing Staff from the City of Concord and the City of Dublin Housing
Consultant, Dan Lopez, A benefit of working with these lending professionals was to ensure that
any financial assistance program that the City of Dublin may develop would work well with
mortgages bcing offcred in the private sector.
As a result of Staff research on existing FTHLP and features that can be incorporated into a program for
Dublin, a Staff Report on FTHLP issues was taken to the City Council for review and direction. At the
September 20, 2005 City Council meeting, the Council requested a joint study session with the Planning
Commission to better review policy issues involved in developing a First Time Homebuyer Loan
Program. At that City Council meeting Staff was asked to provide additional information. This
information consisted of 1) information on the First Time Homebuyer Loan Programs of various other
cities (Attachment 2); 2) description of the various private loan products available today by the lending
industry and how these could affect a prospective First Time Homebuyer Loan Program (Attachment 3);
3) examples of how various incomc households may be able to qualify or not qualify for a Dublin First
Time Homebuyer Loan (will be demonstrated in Study Session); and, 4) a clear definition of a First Time
Homebuyer. Staff has also included a sample of some of the mortgages that buyers of BMR units in
Dublin currently secure and thc monthly paymcnts that result from these mortgages (Attachment 5).
The information requested at the September 20, 2005 City Council meeting is included in this Staff
Report and in the attachments as indicated above. Additionally, Staff has prepared and will hand out and
work through scenarios that will explain how various households may be able to qualify for a First Time
Homebuyer Loan in Dublin and how much assistance would be needed in each case.
First Time Homebuyer Program General Background:
Due to the high cost of housing throughout the Bay Area, jurisdictions can seldom providc residcnts with
full financing to purchase a residential unit. Cities with first time homebuycr programs almost always
provide only partial financing for a home. This requires the applicant to scck other financing. Private
financing is usually the primary financing secured in purchasing residential real estate. If a prospective
buyer goes to a bank, mortgage broker, credit union or uses a California Housing Finance Agency
(CaIHFA) product, it is the major debt that thc homcbuyer incurs.
Any First Time Homebuyer Program provided by Dublin, of necessity, would provide secondary
financing, with the intent to assist in closing the gap between what a buyer could secure in the private
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market and what amount of financing would be necessary to purchase a home. At the same time, private
lenders would not allow a lesser amount of financing from any jurisdiction to place a lien on the title of
mortgaged property ahead of the private loan. Due to this industry-wide restriction, the City of Duhlin
would come in second, or with CalHFA products as low as third Of fourth in the chain of title on a
mortgaged property.
All jurisdictions contacted and all known city programs function by providing a second loan or grant.
All the cities contacted have indicated that they have not had many problems with borrowers defaulting on
their loans; both private loans and city provided loans. It is important to understand that if Dublin
provided a secondary loan and a default on a private loan did occur and should the primary lending
institution foreclose on the property, the City of Dublin could lose the amount that was loaned out. The
private lending institution would have the ability to foreclose and recuperate their losses, however the
same assurance would not exist for the City of Dublin which would be lowef in the chain of title for the
property.
This risk can be reduced somewhat by including an "option to purchase" clause in any loan agreement.
The City of Dublin currently has this type of clause in the Resale Agreements in use with the Inclusionary
Units. With this option, the City of Duhlin would have the option to payoff the first lender, purchase the
property and thcn rcscll it and recuperate the City's losses.
Issues:
Stafr has developed the following issues for City Council consideration to assist Staff in the development
of a First Time Homcbuycr Loan Program (FTHLP).
1. Definition of a First Time Homebuyer
2. The target units for which the City would provide loans.
3. The maximum amount of financing that the City could provide in a First Time Homebuyer
loan;
4. Maximum sale price allowed for a home to participate in the Dublin program;
5. The maximum income that would bc allowed for applicants for a First Time Homebuyer Loan;
6. Discussion of who would be able to utilize the Dublin First Time Homebuyer Loan;
7. The type of loan that the Ci ty could provide;
8. Possibility of equity sharing on repayment of the FTH loan as opposed to simple repayment of
the FTH loan;
9. If any interest should be charged and the amount of interest that could be charged for a FTH
loan at maturity;
to. City preferences in providing FTH loans to applicants;
11. Charging of an administrative fee for providing the loan and servicing the loan; and
12. Maximum assets that an applicant may own and still qualify for a City of Dublin First Time
Homebuyer Loan.
Issue No.1. What should be the definition of a First Time Homebuyer?
BackgroundlRadonak:
The first item is to identify who is a first time homebuyer? Whilc the obvious answer is a household that
has never owned a home, the practical aspects are more complicated. How does one assure that a
houschold has nevcr owned a home beforc? The most common criteria used to determine a "rirst time
homebuyer" is that the household has not owned nor had any interest in residential real estate for the past
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three years (see Attachment 2). It is understood that this is quite different from "never owning a home",
however, Staff has not been able to locate any method to clearly verify lack of ownership beyond three
years.
Discussion/Pros & Con.~:
Pros:
Most private and City agencies, including CaIHFA, use the 3-year rulc. Using the "three year rule" as
criteria to establish a First Timc Homeowner is easily verified by checking the last three year's tax
returns, including the tax schedules that allow for a household to claim the interest on a mortgage. Most
lendcrs, including any proposed Dublin program would require three years tax returns to establish income
and asset ownership.
Cons:
None. Staff has not identified any negative consequences at this time.
Issue No.2.
Should the City of Dublin provide loans for IncJusionary Units as well as market
nlte housing within the City?
Background/Raûonak:
Financial assistance may be made available for qualified buyers seeking to purchase Inclusionary Units,
both new and IncJusionary Units that become available for resale, as well as market rate homes within thc
City linùts, both used homes and new homes.
Discussion/Pros & Cons:
Pros:
Allowing for financing of both market rate and Inclusionary Units would providc the most
comprehensive of first timc homcbuyer loan products. It would also give the interested buyer the most
freedom in what type of unit to purchase.
Cons:
Restricting the financing to only one type of unit, such as existing market rate units, would limit thc
ability of households to purchase housing in Dublin with assistance from the First Time Homebuyer
Loan Program. The City of Dublin docs not have a largc inventory of used homes available for sale.
Limiting financial assistance to these units could restrict the number of loans provided through the
program.
Limiting financing to only Inclusionary Units could also limit the number of loans provided through a
First Time Homebuyer Loan Program since the number of IncJusionary Units in the City of Dublin is still
rather small. Buyers are also more likely to be able to secure private financing for these units since the
sale prices arc restricted by the City's Affordable Housing Agreements and may, therefore, be less likely
to need the City's financial assistance.
Issue No.3.
What is the maximum amount that the City should loan under the FTHLP?
Background/Raûonale:
Reviewing First Time Homehuycr Programs in other cities indicates that when too small an amount is
provided as a loan by the municipality, the program generates very little activity.
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Based on Stafl's research, 10% of the sales price appears to provide a sufficient financial participation to
make a difference in the ability of lower-income households to purchase a market rate home. If the
Council were interested in funding loans for Inclusionary Units, 15% would be recommended.
Market rate homes are generally more expensive than inclusionary units. If the FTHLP were to providc
the same amount of a loan (15%) as for thc inclusionary units, larger loans would be required. For
example, 15% of a home selling at $600,000 would be a City loan of $90,000. Because the City of Dublin
docs not have funding to provide many loans at these high amounts, a lower percentage is suggested for
market rate homes than inclusionary units. If the FTHLP were to provide loans of 10%, inventory of
existing homes in Dublin is rather limited, so Staff anticipates fewer requests tor large loans based on high
sale prices. Additionally, since this type of financing would only be available to first time homebuyers, it
is anticipated that the majority of activity will be in lower priced homes or condominiums including
Inclusionary homes.
Discussion/Pros & Cons:
Pros:
A ten percent loan for market rate homes and 15 % for Tnclusionary homes should generate interest and
applications in the first year of the program.
Cons:
If the median sales price in Dublin is currently $785,888 (Bay East Association of Realtors in October,
2005), a 10% loan may be up to $78,588. This is a substantial amount of money compared to what is
available overall for the program. If many requests come in for loans of this magnitude, the City will not
be able to provide many loans with the $500,000 amount budgeted in Fiscal Year 2005-2006.
Alternatives:
At this time Staff does not have any alternatives that would be recommended for consideration by City
Council.
Issue No.4.
Should the muÎlnum home price a buyer may purchase with financing from the
City of Dublin be set at the latest median price as established by Bay East
Association of Realtors (BEAR)?
Background/RationaJe:
Since the FTHLP is intended for first timc homebuyers, it is assumed that the Program is for those buyers
starting out in the real estate market and not for buyers interested in purchasing the higher end homes.
The homes sold in the City of Dublin have a broad range and can be very expensive. It is theretore
suggested that there should be a limit to the prices of homes that could be financed through the City's
FTHLP. The Bay East Association of Realtors (BEAR) provides montlùy median price listings for single-
family homes and condominiums for most of the cities in the region on the Internet. BEAR is focused on
those cities in the eastern portion of the East Bay, The mernber realtors overwhelmingly work in the Tri
VaHey Area. The statistics collected by BEAR would be used to establish a top sales price for homes that
the City would finance. Using BEAR statistics, the maximum home price would be set at the median. The
median price for a homc in the City of Dublin in October 2005 (the latest month provided) was $785,888
and the median price for a condominium in the City of Dublin in October 2005 was $552,000.
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Discussion/Pros & Cons:
Pros:
Setting the maximum sale price at the monthly median amounts as publishcd by BEAR allows the home
prices of homes financed to adjust and keep pacc with the market rate price of homes in Dublin. This
option also provides a standard measurement that is always accessible for Staff to review and obtain for
any prospective borrower.
Cons:
Limiting the price of homes that may be financed through the City of Dublin program may eliminate some
interested homebuyers,
Alternatives:
The City Council may decide to not have a maximum on home prices that may be financed or may suggest
some other maximum price.
Issue No.5.
Should loans be made available to qualifying households with incomes up to 140
% of the County of Alameda median income?
Background/Rationale:
Current sale prices of homes in the City of Dublin require a household of 4 with 5% down payment to
have over 190 % of the area median income (AMI) to be able to afford purchasing a home at the median
price. Due to the price of homes, more and more workforce households are being priced out of the market.
Many of these workforce households earn above 120 % of the area median. This is particularly the case if
the household is a two wage earner household. Examplcs of households that tend to be just above 120 %
of thc area median income are households with a teacher or police officer as one of the wage earners,
Discussion/Pros & Cons:
Pros:
Staff is suggesting that the FTHLP includes loans that are available to qualifying households with incomes
up to 140 % of the area median income. By accommodating this higher income category more workforce
households may be served.
There is a substantial gap between 120 % of AMI as used by many programs including the City of Dublin
Inclusionary Ordinance, and the 200 % AMI needed to purchase a median priced home in Dublin. Setting
the maximum income of a qualifying household up to 140 % of the (AMI) serves to provide assistance to
more individuals who are slightly above the "moderate-income category" or 120%, and yet cannot afford
to purchase in Dublin. (See Attachment 1, State Income Guidelines for 2005).
There would sti1l remain a gap in affordability for households with incomes above 140 % of AMI;
however, the City of Dublin will need to set the limit at some realistic number, since there is not sufficicnt
financing to assist all houscholds nccding financial assistance all the way up to 200 % of AMI. Several
programs that Staff researched use 140 % of AMI as a maximum household income, including the Silicon
Va1ley Trust Fund and the Home Source Lease-Purchase Program.
Cons:
No cons identified at this time.
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Alternatives:
The City Council may choose to limit the household income maximum at a percentage other than 140%
AMI.
Issue No.6.
Should the City of Dublin offer First Time Homebuyer Loans to nonresidents as
well as Dublin residents?
Background/Raûonak:
This issue addresses who should be served by this program; existing Dublin residents or a broader
audience including those would desire to live in Dublin, but do not live here currently.
Discussion/Pros & Cons:
Pros:
It is possible that many who would seek housing in Dublin and financing assistance may be employed in
Dublin. Assisting these households to move to Dublin may therefore rcduce traffic commutes and assist
in decreasing congestion on local freeways.
Cons:
Providing loans to non-residents would broaden the pool of possible borrowers. If many applicants apply,
it may be more difficult for Dublin residents to secure a secondary loan from the City of Dublin.
Alternatives:
The City Council could considcr providing FTHLP assistance only to Dublin residents. However,
restricting loan funds to Dublin resídents could run the risk of not attracting enough qualified candidates
for loans. The universe of existing residents seeking and qualifying for this type of City financing may be
too small to provide for a succcssful FTHLP.
Issue No.7.
Should the City of Dublin provide loans with payment deferred until the home is
sold or refinanced?
BackgrvundlRaûonak:
This issue addresses when a loan should be paid in full. Generally, there are two methods for loaning
money:
(I) An amortized loan would require that the amount loaned by the City be repaid at some consistent
interval, i.e. monthly. The City of Dublin does not have the Staff or financial structures in place to receive
monthly loan payments from borrowers similar to a bank. This would necessitate a log-in system, posting
of payments, reminders when payments arc late and some method to collect from delinquencies among
other tasks.
(2) A deferred loan postpones the payment of the loan and requires payment with the full amount due at a
later date. Requiring a loan to be due, in full, at some future defined date is commonly referred to as a
balloon payment. However, anothcr method of deferring a repayment is to defer the payment until the
sale of the propcrty or unti I the property is refinanced.
Staff is suggesting that the FTHLP include a deferred loan program with the full payment due at the sale
or refinancing of the home.
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Di~'cussion/Pros & Con."
Pros:
Providing deferred loans allows lower-income buyers to take advantage of a loan source that would not
require payment as the buyers are struggling to pay back the primary mortgage, as first timc homebuyers.
Loans deferred until resale also work well with most private loan products because a primary lender will
not count a secondary deferred loan in underwriting to establish the amount of financing for which a
prospective borrower may qualify.
Cons:
Providing deferred financing takes City funds and makes them unavailable for a longer and uncertain
period of time since Staff cannot know when a buyer intends to sell or refinance the home.
Alternatives:
There are several other alternati ves that the City Council may consider including:
1 Amortizing the City of Dublin FTHLP, requiring monthly payments. This requires additional Staff.
2. Forgive the loan after a given amount of time; or
3. Defer the loan initially for some period of time (such as five years) and then require monthly loan
payments to begin. The loan payments would again, require additional Staff.
Requiring payments on a First Time Homebuyer Loan rcplcnishes the pool of money allocated for the
program more quickly. The moncy would thcn be available for other uses to be developed by the City
Council, or for other fIrst time homebuyers, however would require additional Staff.
As an alternative, the City could contract out for loan servicing, if amortized loans were the preferred
method of having loans repaid. Contracting out may be cumbersome since some monitoring and
supervision is still required of the procured entity. Additionally, there are very few agencies that provide
this type of activity, limiting both the choice and possibly the quality of work provided by the contractor.
Finally, because the City of Dublin docs not have a large portfolio of loans nor is it anticipated that thc
numbers of loans would reach any considerable size, it may be difficult to attract loan-servicing
contractors to provide this service for the City of Dublin.
Forgiving the loan entirely may eliminate any type of collecting activity on qualifying loans and is usually
considered when a municipality is seeking to encourage a specific type of response from borrowers, For
example, to encourage long-term residency, the City Council might decide to put forward a program that
forgave a loan after 15 years. This alternative would reduce the amount of long-term funds that the City
would have for housing activities.
Issue No.8.
Should the City of Dublin First Time Homebuyer loan be repaid with principal
and a share in the equity earned on the City financed home? This option relates
only to market rate units.
Background/Ranonaœ:
The terms of the loan could provide for the City of Dublin to share in the equity with the participant in the
FTHLP. Equity sharing is one method to increase and replenish affordable housing funds for the future.
In this Option payback of the loan would include the full principal loaned as well as some amount of the
equity the borrower has acquired on the financcd property.
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Since the borrower would not have been able to purchase the home without the City of Dublin FTHLP,
thc City of Dublin could decide that the City should share in the appreciation of the propcrty. The
percentage of equity that would come to the City when thc loan is repaid could be the same ratio as the
City loan to the total sales price. For example, on a 10 percent loan, if the original sale price was
$500,000 and the City provided a loan of $50,000, then when thc loan was paid back, the City would
receive $50,000 plus 10 percent of any appreciation on thc property financed. To provide greater security
to the City's loaned funds, thc provision could be that the loan will be repaid with the higher of; the
percentage of equity discussed above or the average rate of return the City of Dublin would have earned
on the money, if the money were invested.
Staff is not recommending as an option to sharc equity on Inclusionary Units where the buyers received a
First Time Homebuyer loan because of the resale agreements these properties have on title. These units
appreciate much more slowly and offer lcss equity to the owners.
Discussion/Pros & Cons:
Pros:
One advantage of equity sharing is that it does not linùt the future sale price of the home through a resale
agreement. Equity sharing uses the real estate market to give control and opportunity to the owner. It
provides the owner a vehiclc to receive the benefit of the appreciation on the property and at the same
time allows the City the ability to receive additional affordable housing funds.
The City of Dublin has In Lieu fee funds, collected from developers to use for affordable housing.
However, the In Lieu fees that wiJI be received over time may begin to diminish, as the City gets closer to
build out and less land is available for development. Finding new sources to generate affordable housing
funds could be useful in the future.
Cons:
Equity sharing docs reduce the amount of equity that a buyer receives for the property that was purchased.
If housing values cease to escalate, or homes began depreciating in value, cquity sharing does not work
well since there is less or no equity to share.
Alternatives:
The City Council may also consider simply requiring thc loan paid back with some amount of interest.
Borrowers would probably view paying the loan paid back with some amount of interest more favorably
since the borrower would be able to keep thc equity earned on the property. Additionally, if the loan were
paid back with some amount of interest, rather than sharing equity, the outcome mayor may not provide
as much money for the City to use for affordable housing purposes depending on the escalation of housing
values
Issue No.9
Should the City of Dublin FTHLP require loans received to be paid back in full,
including interest in the amount of the average rate of return earned by the City?
Background/RaHonak:
Inclusionary Units arc tied to resale restrictions and the equity received by the homeowner selling their
unit may be minimal. Requiring repayment of the First Time Homebuyer loan with interest, instead of
equity sharing is a practical manner to address the special circumstance of the resale restriction on the
price.
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Requiring loans on Inclusionary Units to he paid back with interest would return money to the City of
Dublin that was loaned along with the interest that the City would have earned if this money had bccn
invested instead of used to provide a FTHLP loan.
Di.~cussion/Pro.ç & Cons:
Pros:
If the City of Dublin were to charge interest on the loan, then the City could he paid back in an amount
similar to what the City would have earned if Ùle money had been investcd.
Cons:
Owners of Inclusionary Units wi1l accumulate limited equity on the property they have purchased. This is
because the Resale Agreement that would be entered into under the City's Inclusionary Ordinance restricts
the price the unit may be sold at for 55 years_ If the owners remain in the same unit for longer periods of
time more equity may accrue. If the owner movcs out wiÙlin the first few years, however, the equity
received may be nonexistent or minimal depending on the sale price that is based on the increasc in the
Income Linùts. If this is the full extent of the equity earned and the owner must pay back a loan along
with interest, it is conceivable that the household may be required to pay back more than what wi1l be
received on sale of the house and, therefore, leave with less money than they originally invested.
Alternatives:
The City Council could consider forgiving thc loans entirely for Inclusionary Unit huyers, or allow for
loans to be made with 0 percent interest. Both forgiving the loan and making loans with 0 percent interest
would alleviate the possibility that an Inclusionary Unit buyer may need to pay more than the loan itself, at
resale.
However, both forgiving the loan and charging no interest on a loan would result in thc City of Dublin
receiving money back with less value than when initially loaned or may result in the City receiving no
money back, in Ùle case of forgiving the loan.
Issue No. 10.
Should the City preferences used in the Inclusionliry Zoning Ordinance be
applied to the First Time Homebuyer Program liS well?
Background/Ranonak:
The City of Dublin Inclusionary Zoning Ordinance sets forth certain preferences for purchasing
Inclusionary Units. This option would utilize the same preferences as those established for the
Inclusionary Housing Program. These preferences include those who lived and/or work in Duhlin, public
service employees, including teachers, senior and disabled applicants as well as applicants who do not live
in Dublin hut have an immediate family membcr living in Dublin and applicants that must relocate due to
demolition of existing housing or of condo conversion of existing housing_
The application of this option would result in a ranking system for applications. If an application that was
consistent with the preferences were to submit a complete application for the FTHLP and there were
othcrs ahead of this houschold; Staff could move the applicant with City prefercnces ahead of others
waiting for review and approval.
Page to of 13
Di.~cussion/Pros & Com:
Pros:
As noted under Issue No.5, if this program assisted non-residents, then it may be more difficult for
residents to obtain financing. Allowing for a preference system would address this concem. If Dublin
residents applied, the application would be taken nel\t, not in the order received.
Cons:
Requiring City preferences for the FTHLP would make the administration of the program slightly more
complicated, since verification of any claimed preference must be ascertained prior to proceeding with the
appJicant.
Alternatives:
Staff did not identify any altematives other than not choosing this option.
Issue No. 11..
Should the City of Dublin charge an administrative fee, to be determined, for the
administration and servicing of these First Time Homebuyer Loans?
Background/Raûonaw:
The Affordable Housing In lieu fee funds the Housing Division at this time. The purpose of thc fee is to
assist with the development of affordable housing. While these FTH loans do assist in making housing
more affordable, they do not guaranty long-tcrm affordability to a home. At the same time, as mentioned
earJier, it is estimatcd that as the City builds out the amount of in Jieu fees collected will diuùnish.
Collecting an aduùnistrative fee helps to pay for the services of the Housing Staff to aduùnister this
program.
Sincc the FTHLP will allow the buyer of a market rate home to resell at market rates, the buyer may earn
appreciation from this purchase. At the same time, this type of program is labor intensive. It requires Staff
time to work with applicants. Additionally, the program requires underwriting and communication with
lenders, realtors and escrow companies. A reasonable fee added to the close of sale is a possible way to
extend housing dollars. The amount charged would directly relate to the time and effort that is typically
required by Housing Staff to process the loan.
Discussion/Pros & Cons:
Pros:
Charging a reasonable administrative fee to servicc the loan would assist the City of Dublin in
recuperating the funds that are spent by the City to administer the program and each loan. The fee could
be a reasonable amount and collected by the escrow company at close of the loan, along with all the fees
of financing and purchasing real estate.
Cons:
A fee would add a minimal amount to the cost of the home, The buyer will need to pay this fee along with
mortgage, interest, points and everything else from appraisals to inspection fees.
Alternatives:
The City Council could consider not adding an administrativc fcc to each loan given.
If the City Council deteruùned not to charge this fee. the cost of the house would be slightly less;
however, the amount would be negligihle. This dccision would reduce one fee from the purchasc of a
Page II of 13
home. If the adnùnistrati ve fee were not charged Staff would continue to utilize the in lieu fee for Staff
time to administer the FTHLP. If in lieu fees become insufficient in the future, the General Fund would
need to be used to maintain and service existing loans, whether or not the program wcre to continue
through future fiscal years_
Issue No. 12.
What would be the maximum amount in assets that a household may have and
still qualify for a First Time Homebuyer Loan?
BackgroundlRaûonak:
Primary lenders usually require a reserve in savings when these agencies underwrite loans for applicants.
These lenders want to make sure that a borrower has money in the bank to pay for homeowners insurance,
property taxes and other housing associated expenses. The amounts required in reserves vary from around
$5,000 to 12 times the mortgage payment depending on the type of loan that is being provided.
In discussing an asset cap with lending professionals, City Staff was encouraged to allow borrowers to
maintain an amount somewhat larger than required reserves in savings. The lenders seemed to be
concerned that first time homebuyers may run across unanticipated expenses and would not be able to
cover them without some amount in savings. Furthermore, discussion suggested that those assets that
cannot be turned into cash without substantial penalty (40IK, IRA) not be included in the asset cap.
In addition to the reserve that most lendcrs require of loan applicants, it may be beneFicial to allow
borrowers to have some amount of money in savings to cover an unforeseen emergency. In underwriting
the City of Dublin's FTH loans, Staff would review a number of factors, including wages or actual income
of a qualifying household. For example, if an applicant household is a young family with two wage
earners and this household has assets of $250,000; fuen Staff would be able to make the determination
that some of this money should be used to purchase the home, rather than a City of Dublin loan. On the
other hand, if the applicant is a retired person with a pension (income) of $16,000 and has savings of
$150,000, then it may he reasonable to assume that this individual lives off of the pension and augments
all needs from the savings. This household may be able to qualify. These arc decisions that are usually
made when underwriting the loan.
Dublin Housing Staff has spoken with Staff from several cities; San Leandro, Hayward, Concord and
Walnut Creek and all cities have flexibility in determining the amount of assets fuat an applicant may
posses and still qualify for a loan. With the exception of Concord, none of these cities had a hard and fast
asset liuùt.
As an overall cap, Staff would suggest that no household with assets over $250,000 qualify for a City of
Dublin First Time Homebuyer loan. As stated, the actual situation may vary on a case-by-case basis and
is reviewed and evaluated along with the entire financial status of the houschold in the underwriting
process.
Discussion/Pros & Cons:
Pros:
Allowing for some assets would allow the qualifying household to respond to unanticipated circumstances
with the money in savings. If there were an emergency and the borrower had insufficient savings, one
option the houschold may have to explore to secure cash could be to refinance the home loan and take out
money. However, the City of Dublin requires the City loan to be paid back when this occurs.
Refinancing and repaying a loan that could be in the magnitude of $20,000 - $60,000 could cause a
Page 12 of 13
substantial burden. Additionally, it may be that the refinancing institution is not able to provide the
borrower with sufficient funds to resolve the household fiscal cmcrgency and pay back the City.
This type of scenario would require the City of Dublin to review the applicant's personal situation closely
and make a special determination whether the City loan may remain intact with the individual refinancing
the first home mortgage and taking out money. It may be preferable to allow a cushion for the household
for any potential emergency when first evaluating the applicant for a FTH loan rathcr than later make
discretionary determinations regarding repayment at a later date.
Cons:
Providing loans to applicants with assets up to $250,000 may reduce available loan funding to households
with less income.
Alternatives:
The City Council could consider not allowing borrowers to have any assets above primary lender required
rescrves when applying for a Dublin FTH loan or could consider allowing qualifying applicants to possess
smaller amount of assets.
Requiring first time homebuyers to use personal assets if there arc any, rather than City funds would
stretch the City of Dublin first time homebuycr money further.
Not allowing applicants to have some assets when applying for a City of Dublin loan could cause the
problem in refinancing outlined above. Allowing for a smaller amount as an asset cap would require
setting the cap at some other arbitrary number since the jurisdictions pollcd do not have asset caps.
RECOMMENDATION:
Staff recommends that the City Council and the Planning Commission receive the Staff Report; provide
direction regarding the issues related to the First Time HOffiebuyer Loan Program; and direct Staff to
return with a draft of a First Time Homebuyer Loan Program.
Page 13 of 13
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Most Common Private Home Loans
Implications for Dublin's FTHLP
The following list represents loans that are currently available to households who want to
purchase either market rate or below market rate units in Dublin. Tbis list also includes
analysis of how these loans may affect the success of a Dublin First Time Homebuyer
Program.
1. 30-year Fixed Loan
· Would require "A" credit rating (700 + FICA Score)
· Higher income necessary since the amount of financing the household may
qualifY for is less than in other products. (More likely to be moderate-income
or up to 140% income households)
IMPLICATION FOR CITY LOAN PROGRAM:
· May need more financial assistance to close the gap in purchasing a home.
· Most secure type ofloan to pair with City money.
· Fewer households may be able to secure a 30-year fixed loan than would be
able to secure with some of the adjustable rate products.
2. IS-year Fixed Loan
· Would require "A" credit rating (700+ FICA Score)
· Would be available to higher income households (More likely to be moderate-
income households or up to 140% income)
IMPLICATIONS FOR CITY LOAN PROGRAM
· Would need even more financial assistance than 30-year loan since the loan
must be paid back in 15 years instead of 30. This means the household would
qualifY for less bank funding than with a 30·year loan,
· Fixed interest loans, which are the most secure types ofloans, to pair with
City money.
· Few household may be likely to secure this type ofloan so less assistance may
be given through the FTHLP.
3. Adjustable Rate Mortgages (1/1, 3/1, 5/1 ARMS)
· Varies from aI, 3 or 5 year fixed interest rate mortgage to an adjustable
interest rate for the remainder of the loan. This is the most common mortgage
that Housing Staff has seen in buyers of the lnclusionary Units at the
Terraces.
· Available to households with lower income, since the lender is providing a
lower interest rate and consequently a lower monthly payment results for the
first one, three, or five years. After that fixed period, the interest on the Joan
will usually adjust annually.
· Usually has a maximum adjustable amount, both annually and for the life of
the loan.
· When the loan adjusts, this loan may be a burden to the homebuyer if the
monthly paymentjurnps beyond what the household can afford. If this is the
case, the household may try to refinance and secure alternate financing.
1
ATTACHMENT 3
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IMPLICA nONS FOR CITY LOAN PROGRAM
· May need less financiaJ assistance to purchase a home since these loans are
able to provide higher amounts of financing.
· May be available to slightly lower income households.
· Credit scores may be slightly lower than that of the fÏ.xed rate mortgages.
· Loan will likely be refinanced by homebuyer at shift to adjustable interest
rate, requiring subordination documents and further review by City Staff of
future loan product.
· Slightly more risky than fixed rate mortgages since there is the possibility that
a household will have difficulty making payments when the interest rate
adjusts and the mortgage payments increase, especially if the household is
unable to refinance tor some reason.
4. Interest Only LoaDs
· Applicant pays interest only for a given period of time, usually 5 to 10 years.
After that time, the entire mortgage is amortized, including interest for thc
remaining period, say 25 or 20 more years. .
· This is usually one of the easiest loans to qualifY for, especially for
households with less than "A" credit, or for those households with less
income.
· One of the most popular new loans provided by the private lending industry.
Applicants typically assume that they will refinance the loans before the
principal becomes due. This may not always be possible since the full loan is
still due, after the interest-only period. If very little equity is earned on the
property or the interest rate jumps too high, the household may not be able to
refinance, burdening the homebuyef with monthly payments that may be too
high for them to aftord.
IMPLICATIONS FOR CITY LOAN PROGRAM
· May need to provide far less financing to fill the gap between a home price
and the amount that can be financed since larger loans may be provided.
· May be able to assist households with lower incomes.
· Usually available to households with lower credit scores. (less than "A"
credit)
· Will most likely be refÏ.nanced as soon as the interest only period expires,
requiring subordination documents and further review by City Staff of future
loans.
· Much riskier loan for City tinancing to pair with since the possibility exists
that the note holder will not be able to refinance in any favorable manner. In
this scenario, a default could occur. Should the City loan holder default and
the lending institution foreclose, the City of Dublin could lose the money that
was loaned as a second loan.
5, Negative Amortization Loans
· Many types of variations of loans where the principal increases, rather than
decreases over time. Negative amortization loans that are given for the
purchase of a home usuaJly hold a lower interest fate than wbat is available
2
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6D1o
elsewhere. The monthly payment is calculated based on the lower interest
rate. At the same time the lender uses an index to increase the "actual"
interest rate on the loan based on the interest rate in the market. The monetary
difference created between the lower interest rate the buyer is making
mortgage payments on and the "actual" interest rate is added to the debt owed
by the buyer. The amount of the loan therefore increases.
IMPLICATIONS FOR CITY LOAN PROGRAM
· May require less financing by the City if the applicant can secure a larger
primary loan through this type of financing.
· May be more available to households with less than "A" credit.
· May be more available to lower income households.
· Will require in depth review of product to determine the long-term
consequences of the particular product.
· Any loan where the principal increases means that the primary lender will
have a higher fiduciary interest in the property, and the City less fiduciary
interest, risking the City's position on title.
6. Lines of Credit
· Usually used in conjunction with a primary loan. This allows for the applicant
to qualify for a lesser amount of money and boost the total provided by
securing a line of credit for the remainder, For example, a household may
only qualify for $400,000 in a primary loan, but be able to secure a line of
credit for $80,000, boosting the financing provided to $480,000. The Lines of
Credit discussed here are secured by a lien on the title to the property being
financed.
· Lines of Credit come in many forms, they may be interest only for a given
period of time, or require some payment of principal and interest, or have
options where the applicant may select whether to pay principal and interest or
some variation each month.
· Most Lines of Credit allow for a period of time when the applicant may
continue to draw on the funds similar to a credit card.
· Interest can change with only a one-month notice.
IMPLICATIONS FOR CITY LOAN PROGRAM
· Easier to secure this type of financing as a secondary mortgage, rather than
pay Private Mortgage Insurance (PMI).
· Is relatively available to buyers with less than good credit.
· May be a manner for households that cannot secure enough in a frrst
mortgage, even with City assistance, to be able to purchase a home.
· Extremely risky to pair with a City loan product since neither the City nor the
applicant is able to determine how much the interest rate may increase and
because the applicant may continue to draw funds fiom the Line of Credit
further encwnbering the property.
· Would require the City to drop in position on the title of the property to third,
since thc primary loan would be first and the Line of Credit would be second.
3
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· Refinancing would be very common with these products and require Staff
time in reviewing new loan products and in producing subordinating
documents.
7. Specialty Loans such as Call1FA HiCapp and CHADAP Loans
· These loans are created especially to accommodate the need for f1llll.!lcing to
lower income households and to provide entry to the homebuyer market by
the State of California, They arc successfully used by many cities throughout
the region including Livermore, Hayward and Fremont.
· CalHF A has a variety of loans, some of which cannot be used in Dublin
because the maximum sale price allowed ($569,633) tends to be lower than
the home price of entry level homes in Dublin. However, buyers seeking this
financing as well as applying for City financing may purchase condominiums,
Inclusionary units or some older homes,
· Additionally, CalHF A insures their own loans so the applicants are not
required to seek PMl insurance.
¡MPLlCA nONS FOR CITY LOAN PROGRAM
· Typically a good loan for mwricipallending programs to pair with because it
works with the needs of the community.
· This is a loan type that is usually readily available to lower income
households.
· Will lend at an interest rate that is often substantially below the market
interest rate.
· Will review all loan dOCllments the City of Dublin utilizes for a secondary
loan program and must approve before can pair with a City loan program.
K;HOlISINO/I" Tlmo Homebuyers/ Supp 1br WQfkshop.Typ<, ufl....' "n morket
4
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FIRST TIME HOMEBUYER LOAN PROG~ (fTHLP) ISSUES
Issues: ~commerufatüm: lFros: Cons:
1. Define a First Time Household that have not had Easily verifiable with tax None
Hornebuyer. ownership or interest In returns. Industry-wide
residential property within the standard
cast 3 vears
2. Should the City provide loans Loans be made available for Larger pool of Limiting homes that may be
for Inclusionary Units as well as purchase of bo1h Market Rate applicants purchased will limit scope of
market rate homes? homes and Inclusionary program
homes
3. What Is the maximum loan 10% of sale price for Market Will generate interest in May not be able to provide
amount the City should consider Rate homes and 15% of sales program by lenders and many loans
I orovidina? orice for Inclusionarv homes aoolicants
4. Should there be a maximum Median sale price as Will keep pace with May eliminate some
sales price for the homes using established by Bay East market interested homebuyers
City loans? Assoc. of Realtors
5. Should loans be provided to Households up to 140% of Higher income limits will None at this time
households with incomes up to AMI help with gap between
140% of Area Median Income? income and market
orice of homes
6. Should loans be offered to Loans available to residents Reduce traffic and May be more difficult for
non-residents as well as Dublin and nonresidents commute residents to compete for
residents? loans with nonresidents
7. What types of loans should Loans should be deferred Will help applicants in Will make housing money
the City provide? qualifying with private unavailable until later date
lenders
8. Should repayment of loans Market rate homes: the higher City will have new Owners will not receive full
include a share in the equity of equity share in repayment revenue source to equity
earned for the home? or the average rate of return continue housing
the City WOuld have earned on programs
the money
9. Should interest be charged on Interest charged only on The City would receive May be a burden on
the loans, which loans and how Inclusionary Units interest in the amount Inclusionary Unit owners, if
much? the money would have homes do not appreciate
been invested much.
10. Should City preference be No recommendation at this Would allow Dublin Would require more
used in the FTHLP? time. residents ahead of administrative time.
nonresidents
11. Should the City charge an A reasonable administrative Would provide for the Would add a minimal
administrative fee for servicing fee be charged Staff time involved to amount to cost of home
the loans? administer pl'O!Iram buying
12. Should there be a maximum Maximum amount of assets to May help homebuyers May reduce available loan
in applicant assets allowed to be determined in underwriting weather emergencies funding to lower income
participate in the program? If so, without having to households
how much? refinance
G:HOUSING/I ¡ïr Time Homebuycr programlTablc: for COUßci) 9200S
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