A well-intended, but somewhat poorly timed, lease-purchase program sponsored by Freddie Mac and the Bank of America could cause buyers to pay more for a home than it's worth.

By the time participants in a new lease-purchase program are at the end of the lease portion of the contract, home values could have fallen substantially, but buyers who opt to buy will have to pay prices that are years old.

Nevertheless, the East Bay-Delta Lease-Purchase program, administered by the Fremont, CA-based East Bay Delta Housing & Finance Agency could open the door to home ownership for many who could not otherwise afford or qualify to buy.

Also, program participants who stick it out and remain in their homes through the next bust-boom cycle likely will enjoy appreciation sufficient to offset any initially higher-than-market price.

"Anybody who purchases a home today or at any time in the cycle is at risk. It's the nature of real estate, but before this recession people were calling and constantly complaining about rents rising. With a home, you have a stable monthly cost and ultimately home values will go up," said Gloria Ortega, East Bay Delta executive director.

"The feeling is that people in this population are not going to walk away from owning property," she added.

Designed to help families with blemished credit, a lack of traditional credit, or a lack of funds for a down payment move into a home, the 38-month lease-purchase program is available to households earning up to 140 percent of the area's median income, $100,250 for a family of four in the Oakland area.

The lease-purchase program is available in some East San Francisco Bay Area cities, including Oakland, Pleasanton, Livermore and Fremont in Alameda County, East Palo Alto in San Mateo County and all cities in Contra Costa County.

Generally, participants, who each month for 38 months make what amounts to the cost of the actual monthly mortgage payment (principle, interest, taxes and insurance), can opt to assume the home's mortgage -- sooner under certain conditions. A sooner assumption may be prudent. Current real estate markets in the area are yielding flat and falling prices.

Even though you are effectively paying the mortgage, you don't get to deduct mortgage interest because East Bay Delta is the home's actual owner.

Lease-Purchase Costs

You don't need a cash down payment or cash for closing costs, thanks to financial support from California Home Loan Insurance Fund (CAHLIF), but you will be charged a commitment fee equal to one percent of the purchase price. That's $2,750 on the maximum allowable loan of $275,000. Other fees include a $500 application fee, a $25 per person credit review fee, a similar cost for an annual credit report check to keep tabs on your financial well-being, a loan assumption fee and transfer taxes.

The first mortgage loan has a fixed interest rate of 7.75 percent for the life of the 30-year loan term. That's high, compared to current rates that were as low as 6.32 percent on Sept. 21, according to BankRate.com, but the higher cost helps offset bond-related closing cost assistance equal to 4.5 percent of the loan amount.

For the down payment, you will also have a second mortgage equal to 3 percent of the first mortgage amount. This second mortgage loan has a 3 percent simple interest rate and payments are not required until you sell the property, refinance or stop making payments on your first mortgage.

During the lease portion of the contract home owners insurance will cost more than what you'd pay if you purchased the home outright and there's added insurance to protect East Bay Delta should you decide to stop making your lease payments.

You'll also have to pay an average $40 monthly lease servicing and property management fee. Once you assume the mortgage, however, those extra monthly costs will fall as insurance costs decrease and lease servicing and property management fees disappear.

Participants must also attend financial and home ownership counseling and workshops and they must make timely monthly payments in order to exercise the purchase option at the end of the lease term and assume the mortgage.

You can assume the mortgage early, after 12 months of successful on time payments, subject to a fee equal to 0.23 percent of the then outstanding principal balance of the related mortgage loan times the number of months remaining in the term of the lease.

For example, if you lease-purchase a home valued at $200,000 and if you wanted to assume the mortgage after only 13 months, your early assumption fee would be $11,063, according to East Bay Delta.

"I want to see more Oaklanders owning their homes," said Oakland Mayor, Jerry Brown. "Through this program people with credit or down payment problems can still achieve the dream of home ownership," he added.

Consult your tax advisor or financial planner to determine if this mortgage program is for you.

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