CA to help first-time home buyers qualify for 40- year loan with $0 down

Up till now, first-time California buyers trying to stretch financially to purchase a house with a 40-year mortgage - instead of the standard 30-year loan - had to turn to the private sector.

But soon the state of California will offer a helping hand. The California Housing Finance Agency says it plans to offer its own 40-year home loan this spring with a fixed, below-market interest rate.

While CA residents will not need a down payment, they will have to qualify as first-time buyers and meet CalHFA's income requirements and other criteria. The agency says its 40-year mortgage is for people who can't afford to buy a house with a 30-year loan and are averse to risky financing that threatens future payment shock, such as adjustable-rate, interest-only loans.

For example: A household using a zero-down, 30-year CalHFA mortgage would need to earn about $72,500 a year to buy a home selling for $355,000. The same family using a 40-year loan could qualify with an income of about $68,400.

CalHFA has offered traditional fixed-rate, 30-year mortgages for nearly three decades. Last year it launched a fixed-rate, 35-year loan with interest-only payments for the first five years. That plan now accounts for 40 percent of its mortgages.

CalHFA promises interest rates that officials say they try to keep at least one-half to one full percentage point below prevailing market rates. But borrowers must qualify as first-time buyers and fall within CalHFA's income and home price caps, which vary by region.

Though they're new for CalHFA, 40-year loans are old news among private lenders, who last pushed them in a big way during the height of the previous real estate cycle in the late 1980s and early 1990s.

More lenders have begun to offer 40-year loans as a way to attract borrowers who are having a harder time qualifying for the riskier forms of financing. With the rise of short-term interest rates over the past year and a half, such loans have gotten more expensive. And many lenders are simply searching for something different to attract borrowers amid the recent slowdown in refinancing and home purchases.

However, CalHFA's 40-year loan does have some drawbacks:

* The agency expects the interest rate to be roughly one-eighth of a percentage point higher than its 30-year loan. As of last week the 30-year loan had a rate of 5.5 percent.

* Borrowers won't pay down the principal nearly as fast when compared with a traditional 30-year mortgage. This means the cost of the 40-year loan will be significantly higher over its full term.

CalHFA officials predict their 40-year loan will account for 15 percent to 20 percent of the agency's loan business within the first year.