How the Prop 37 loan works

The three pieces of money

Buying a home with this program means combining three sources. Each is set by a different party.

• Your money, at least 3 percent. The measure says this must come "from a source other than a grant or borrowed money."
• The Prop 37 loan, up to 17 percent. It's secured by a secondary mortgage on the home and can only be used toward the purchase price, though the agency may allow it to pay closing costs too.
• A first mortgage, usually 80 percent. This comes from a regular lender. Your approval, rate and payment depend on that lender. CalHFA must set underwriting criteria aligned with Fannie Mae, Freddie Mac or FHA standards.

Together, you and the state loan reach 20 percent. The California Budget & Policy Center notes that this avoids private mortgage insurance on the first mortgage. That's a real saving, but you also take on a second loan payment.

A worked example

Say a buyer picks a new home priced at $700,000 and uses the full 17 percent.

The cash you need up front falls from $140,000 to $21,000, before closing costs. The total you owe rises from $560,000 to $679,000. That's the trade. See what it means each month with the cost calculator.

Where the money comes from

Prop 37 doesn't use tax dollars to make loans. The Legislative Analyst explains that CalHFA can sell up to $25 billion in revenue bonds to investors. Buyers' monthly payments repay those bonds over time and cover the program's costs.

That's why the analyst estimates no direct state or local costs. The measure says the bonds aren't a debt of the state or a pledge of its credit. Hoover Institution reviewers note the "no cost" claim depends on repayment, and that trouble in a state-branded program could create pressure for a backstop.

The funding model also ties the program to the bond market. CalHFA decides how much to sell and when, up to the cap. The analyst lists investor demand as a key unknown. If investors want a high return, the loan's rate has to be higher to pay them.

Borrower protections

The rate isn't set, but these points are written into the measure's text:

• The loan must have a fixed rate
• No penalty for paying early
• An origination fee of no more than 0.5 percent or $290, whichever is greater
• No other loan fees without agency approval
• A temporary hardship deferral of monthly interest payments, on request, under agency criteria
• Cash-flow underwriting if your credit scores don't qualify, using records such as bank statements, paystubs and rent history
• Homeowner education for borrowers who would benefit, including first-time buyers
• An independent annual audit of the program

Borrowers must also retain a licensed California real estate agent or broker. You can check a license with the California Department of Real Estate.

What CalHFA still has to decide

The measure leaves the core loan terms to CalHFA. It says interest rates, amortization, principal repayment and prepayment terms must be "practical and favorable to applicant" and still support the bonds. Its rules are approved by its board and are exempt from the state's Administrative Procedure Act, so they won't follow the usual public rulemaking steps.

The text we reviewed doesn't state any of these:

• The interest rate
• The length of the loan
• When the loan must be repaid if you sell or refinance
• How long you must live in the home (the agency sets this)
• Whether it can be combined with other assistance
• Minimum credit scores

Compare that with other CalHFA programs, which have clear terms today. The measure also limits later changes: amendments need more than a 60 percent vote in each house and must fit its purposes.

How it works: questions