September 5, 2019

San Francisco City Second Loan Program: A Ripoff to The Home Buying Consumer

San Francisco City Second Loan Program

What a Ripoff to the Home Buying Consumer!

I recently read an article in the San Francisco Chronicle about housing aid provided by the City of San Francisco.  One program mentioned in the article - although not by name - was a city program that provided loans of up to $375,000 for the purchase of a home in San Francisco.

So I got to wondering just how this program works, and I looked it up.  Yikes!  Does anyone who uses the program actually read the legal documents they sign?  Because Holy Cow, the San Francisco City Second Loan Program is an absolute ripoff to the home buying consumer!  Here's a description of the program and why I think it's an absolute ripoff to the consumer.   This is going to be a longer post than normal, but I assure you it's worth the read.

The Home Purchaser/Borrower:  First off, the borrower's income musts be no more than 120% of the median income for the San Francisco Metropolitan Area.  The borrower must also be a first time home buyer, defined as not having purchased a property within the past 3 years.  The borrower must contribute a minimum of 3% towards the down payment on the property.  Of this amount,  1.5% must come from the borrower's own funds; the remainder from gifts or grants. 

Not with the San Francisco
City Second Loan Program!
Property Purchased:  Regarding the home purchased, only certain properties, in certain area of San Francisco, can be used with the program.  The program refers to the homes as "units", so I assume they are all condominiums, no single family homes.  None of the units has more than 3 bedrooms.  Oh, and get this:

The size of a household must be compatible with the size of the unit being purchased.
A minimum of one person per bedroom is required.

So if you are a single individual, the largest unit you can purchase is a 1 bedroom.  You're screwed if you want a 2nd bedroom to use a guest room, or home office.  If you are a couple, you can purchase a 2 bedroom.  But want to purchase a 3 bedroom to accommodate 2 children planned for the future?  No can do.  You're screwed once again.

Loan Terms.  Here's the real kicker.  And the real ripoff.  The San Francisco City Second Loan Program currently provides a maximum loan of $375,000.  Nothing bad or wrong about that.  The remaining mortgage would come from a traditional mortgage lender.  The City Second Loan is secured by the property, and sets in 2nd place on the property behind the traditional mortgage lender.

Loan Repayment, when the borrower really gets it in the rear end!  Now here's the real ripoff:  The Second City Loan Terms.   The City Second Loan is a 30-year loan with no interest and no monthly payments.  The loan become due ... in full, more on that ripoff next ...  upon the (1) sale of the property, (2) rent of the property, so no roommates or airBNB business for the property owner,  (3) title transfer of the property, or (4) at the end of the 30 year loan term.  And what is the "full" amount of the loan repayment?

 The borrower must immediately repay - in full, no payment plan - an amount equal to:

The original amount of the loan plus a share of the appreciation of the property, calculated at the appraised value at the property at the end of the 30-year term, or when the borrower sells, rents, or transfers title on the property.

And just how much appreciation value is added to the original loan amount to determine what the borrower must repay to the City of San Francisco?  Get this:  After the appreciation on the property is determined, the appreciation value amount that must be paid to the City of San Francisco is same percentage the City Second Loan was to the property's original purchase price!

Example:  A borrower receives City Second loan in the amount of $375,000, and purchases a property for $950,000.  The City Second loan amounts to 39% of the original purchase price.  So the City of San Francisco must be paid back both $375,000 (the original City Second loan amount) PLUS 39% of the property's appreciation at the time the City Second loan becomes due.  If the loan comes due after 30 years and the homeowner wants to remain in the property, how is the homeowner going to immediately come up that that huge amount of money, in one lump sum, to pay of the City Second loan?  I mean, how many people are going to have access to that amount of cash?  Almost none, right?!  The homeowner likely will be forced to sell to get funds to pay off the City Second loan, or foreclosed upon by the City of San Francisco.

What a ripoff!  Yet another example that if something appears too good to be true, it likely is.

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  1. Thats a lot of money to pay back. Also what happens to the loan if title changes due to marriage or divorce?

    1. On the program's website, the loan information states that the program will
      - consider - title changes due to marriage, divorce, or death. BUT the program still has the right to deny any title change. That right of denial is wrong, in my opinion. If the loan program is short on cash, it is simply going to deny the title change, and the loan holder(s) is/are screwed.

      The website does not list any consideration for a title change due to putting the property into or out of a trust. So it appears if that was done contingent with estate planning or a living trust change, the loan payoff (original amount plus a percentage of appreciation) would come due immediately. That's a ripoff, in my opinion.


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