CalHFA Forgivable Equity Builder Loan – Five Things You Should Know

Forgivable Equity Builder Loan photo graphic

by Greg Stidham, REALTOR® (updated December 7, 2022)

*** IMPORTANT UPDATE *** The funds for the Forgivable Equity Builder Loan program have been exhausted. This blog post will remain for archival and reference purposes.

This program is great news for first-time homebuyers!

The California Housing Finance Agency (CalHFA) announced a new program on March 16, 2022 and you’re probably starting to hear about it in the news as it starts to become available to first-time homebuyers. The new program is called the Forgivable Equity Builder Loan and it’s just like it says in the title – forgivable.

Let me say that again… FORGIVABLE! As in, you don’t have to pay it back. Keep reading for details.

I first heard about this program like you probably did – I heard a news story announcing it on May 1. The loan actually became available for use on April 4, 2022, but it is definitely flying under the radar. Almost everyone I talk to has not heard of it. I’ve spent a couple days locating the details to get the facts for you.

Here’s my list of five things you should know about CalHFA’s Forgivable Equity Builder Loan.

1) First-Time Homebuyer-

This program is for first-time homebuyers that are either a citizen or other National of the United States or a “Qualified Alien” as defined at 8 U.S.C. § 1641.

You are a first-time homebuyer if you have not owned or had an ownership interest in a principal residence in the last three years. If you and a partner or spouse apply to the program together, neither of you could have had an ownership interest in a house in the last three years.

Because you are a first-time homebuyer, CalHFA requires that you take a Homebuyer Education course. This 8 hour course can be taken online for about $99 and will teach you about the importance and responsibilities associated with home ownership. You can also take the course in person through NeighborWorks America or any HUD-Approved Housing Counseling Agency (price varies by agency)

Exceptions to the first-time homebuyer requirements.

Borrowers using HUD Section 184 Indian Home Loan Guarantee Program

Borrowers using FHA Section 203(h) Program who had a home destroyed in a Federally recognized Major Disaster (contact a CalHFA lender for details).

CalHFA says:

To qualify for the Forgivable Equity Builder Loan, all borrowers, including co-borrowers must reside in the home and meet the definition of a first-time homebuyer.”

A first-time homebuyer is defined as a borrower who has not had an ownership interest in any principal residence or resided in the home owned by a spouse during the previous three years.”

2) Occupancy –

You can use this program to purchase a home anywhere in California.

All borrowers must occupy the residence as their primary residence within 60 days of closing. This could be a problem with sellers who want extended rent back after COE. Make sure your agent knows about this requirement.

All borrowers must occupy the property as their primary residence for five continuous years to qualify for loan forgiveness.

Non-occupant co-borrowers are not allowed and non-occupant co-signors are not allowed.

3) Lender Details-

The Forgivable Equity Builder Loan is only available through a CalHFA-approved lender and is used in conjunction with a CalHFA first mortgage for down payment and/or closing costs.

If you qualify for the CalHFA first mortgage, you will qualify for the forgivable loan also. The same guidelines are used.

Allowable CalHFA first mortgage loans are CalHFA FHA, CalHFA USDA, CalHFA VA, or CalHFA Conventional. You cannot combine the Forgivable Equity Builder Loan with a CalPLUS / ZIP or MyHome.

Property must meet the requirements of the applicable CalHFA first mortgage. CalHFA loans can be used for conventional single family homes, condominiums, and manufactured homes on a permanent foundation (homes in a mobile home park not allowed).

4) Forgivable Equity Builder Loan Details –

The Forgivable Equity Builder Loan amount is 10% of the home’s sale price or appraised value (whichever is less). This can make a big difference for many first-time buyers. As interest rates rise, buying power has lowered. This forgivable loan helps regain some of that buying power for buyers shopping for a home.

The Forgivable Equity Builder Loan and payments are deferred for the life of the CalHFA first loan.

One detail I find very disappointing about this loan is that it is taxable.

Yep, you read that correct. Taxable

I originally wrote this post in May, 2022 based on the April, 2022 revision of the CalHFA Forgivable Equity Builder Loan Handbook. I learned in October, 2022 that the Forgivable Equity Builder loan is also a taxable grant. CalHFA updated this detail in the July, 2022 revision but it wasn’t brought to my attention until October. (insert jaw drop here)

It’s true that if you live in the house for five years, the loan / taxable grant is forgiven, but, you can expect to receive a 1099G for each of the five years until the loan is fully forgiven.

Plan for the 1099G to arrive so you’re not surprised.

The amount of tax you pay is probably based on your current income tax bracket. Consult a tax professional for your situation.

The Forgivable Equity Builder Loan is a subordinate loan on the house (2nd lien). This means that if at some point before you live in the home for five continuous years you decide to sell the house, refinance, payoff the CalHFA first loan, or receive a notice of default (foreclosure), the loan will be due and you will need to pay back the Forgivable Equity Builder Loan. Depending on when these events happen during years 1 to 5, a prorated forgiven amount will be calculated.

The Forgivable Equity Builder Loan has a maximum Combined Loan To Value (CLTV) ratio of 105%.

The CLTV is the combined total of both the CalHFA first loan and the Forgivable Equity Builder Loan second loan. 105% means that CalHFA won’t loan you wads of money to pay over asking but you could use the loan to help pay for closing costs. Maybe you have some money in a savings account. You could use the cash you have to pay over asking and let the Forgivable Equity Builder Loan pay your downpayment and some or all of your closing costs.

This might leave you with less equity when you close escrow but it might be the difference between getting an offer accepted and actually getting a house in this competitive market.

Be creative with how you allocate your cash.

I think the Forgivable Equity Builder Loan would work well for a borrower who has additional funds to add to the purchase. Let’s say you have enough cash for a 5% – 10% down payment. Combining your cash with the Forgivable Equity Builder Loan could bump you up to having a 15% – 20% down payment which would lower your CLTV.

One more thing, you can’t use the Forgivable Equity Builder Loan to payoff borrower debt and lower your Debt-to-Income (DTI) ratio or receive cash back. Excess funds must be applied to reduce principal. In case you’re wondering, the Forgivable Equity Builder Loan is not assumable.

Don’t forget the best part.

If you live in the house continuously as your primary residence for five years – the entire Forgivable Equity Builder Loan is forgiven.


5) Income & Credit Requirements –

There is an income cap for first-time homebuyers to participate in this program. Usually all CalHFA loans have some sort of income cap and the cap on this one is for the combined gross verifiable income of the borrowers. The income ceiling allowed is less than 80% Area Median Income (AMI) of your area as determined by the Fannie Mae lookup tool.

The area I help buyers is Yolo, Sacramento, and Solano counties in California. These areas are $81,920, $81,920, and $86,960, respectively.

The income limits in high income areas of California are quite high. 80% AMI is $120,880 in many parts of the Bay Area. You might qualify and not think you do, so check it out.

Lenders will also follow CalHFA guidelines to determine if you have a minimum credit score and don’t exceed the maximum Debt-to-Income (DTI) ratio requirements. The current minimum credit score is 680 with a maximum DTI of 45% for most programs. If you have a good credit score above 700, the maximum DTI is 50%

These five things I have listed are pretty much the whole loan program. There isn’t much small print to worry about. My blog post is based on the CalHFA Forgivable Equity Builder Loan handbook.

You should consider these programs if you’re a first-time homebuyer.

I’m a big fan of CalHFA programs because my first house, which I purchased as a first-time buyer way back in the nineties, was with a CHAFA loan (now CalHFA). I understand that times are a little different now for many people but don’t give up so fast. I see homes available in my market that someone could use with this program.

My advice to you – Talk to a real estate agent that knows these programs and genuinely wants to help first-time homebuyers. These agents can also introduce you to CalHFA lenders to help put you on a path to home ownership.

You can contact me, (530) 564-9226 or, and I will work to help you navigate your path to first-time homeownership in the Sacramento, Davis, Woodland, or Dixon areas of California. I can also refer you to quality agents if you are looking for one outside the area I work in.

Thank you for taking time to read this blog post. My goal is to help make the home buying and selling process as stress free as possible. If you are in the Northern California communities of Davis and Woodland or the greater Sacramento area, please contact me. You deserve to work with a real estate agent that cares about you and is looking out for your interests.