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How the Community Seconds Mortgage Program Works

How the Community Seconds Mortgage Program Works

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience
  • Community Seconds Mortgage Program Overview
  • The Community Seconds mortgage program offers eligible borrowers second mortgages to help pay for the down payment or closing cost to buy a home. A Community Seconds mortgage is one of the most popular types of down payment assistance program. Borrowers combine a Community Seconds mortgage with a first mortgage, including low down payment options such as a HomeReady or FHA mortgage, to purchase a home with little or no personal financial contribution.

    For example, a borrower may qualify for a $80,000 mortgage to buy a home priced at $100,000 but may not have sufficient funds for the $20,000 down payment or closing costs.  The borrower can use a $20,000 Community Seconds mortgage to pay for the down payment which enables the borrower to buy the home.  Proceeds from a Community Seconds mortgage may also be used to pay for mortgage closing costs and minor property renovations.  

    The Community Seconds mortgage program guidelines are established by Fannie Mae but the program is provided through participating housing agencies and non-profit housing organizations in cooperation with first mortgage lenders.

  • How to Apply for a Community Seconds Mortgage
  • Community Seconds mortgages are provided by federal, state or local housing agencies, commissions or departments; non-profit housing organizations; regional Federal Home Loan Banks through their affordable housing programs; or, your employer.  Most Community Seconds mortgages are provided through state or local housing agencies or commissions.  To apply for a Community Seconds mortgage you contact a HUD-approved state or local housing agency or commission to determine the programs they offer.

    We recommend that you contact the housing agency, commission or non-profit organization about the Community Seconds program first because they may have a list of preferred mortgage lenders that they work with and they may have resources to help guide you through the mortgage process. Additionally, the housing agency, commission or non-profit organization may offer additional home buyer assistance programs that may be applicable to you.

    • Find HUD-approved housing agencies or commissions HUD WEBSITE

    It is also important to highlight that the housing agency, commission or non-profit organization may have limited funds available for Community Seconds so we recommend that you contact these organizations well in advance of when you intend to apply for the program.  Contacting these organizations in advance can help you understand program availability and better position you to qualify for the program. 

    Please note that the application process for a Community Seconds mortgage is separate from the application for your first mortgage.  While you apply for the Community Seconds loan with the housing agency, commission or organization that offers the program program, you apply for your mortgage with a traditional lender such as a bank, mortgage bank, mortgage broker or credit union.

    We recommend that you contact multiple lenders in the table below to learn about the low down payment mortgage programs they offer. Combining a low down payment program with a Community Seconds loan reduces your personal financial contribution and makes buying a home more affordable. Shopping for your mortgage and comparing programs is also the best way to find the loan and lender that are right for you.

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  • How Does a Community Seconds Mortgage Work?
  • There are different types of Community Seconds mortgages and borrowers should understand how their specific program works before applying.  We summarize the most common types of Community Seconds programs below.

    Down Payment Grant.  With a down payment grant home buyers are not required to repay the grant at any point over the course of owning their home. Home buyers should think of this type of grant as a gift. These types of grants are typically smaller and limited to less than 3% of the home purchase price.  Some larger Community Seconds mortgages require that borrowers live in the property for a certain length of time and the mortgage is forgiven over that period of time. 

    Subordinated or Silent Second. With a subordinated or silent Community Seconds mortgage borrowers are not required to make any payments on the loan until the first mortgage is paid off or the property is sold.  You repay the Community Seconds mortgage in full, plus interest, when you sell or vacate the home, refinance or payoff the first mortgage. This type of Community Seconds mortgage is also called a “silent second” because the payments are deferred, which means you are not required to make payments until a repayment event is triggered, such as selling your home or refinancing your first mortgage. Deferring payments on the Community Seconds mortgage helps to keep your monthly mortgage payment affordable.  Please note that although the payments on this type of Community Seconds mortgage are deferred you are still required to pay your first mortgage, as well as property tax, homeowners insurance and other applicable housing-related expenses such as mortgage insurance and homeowners association (HOA) dues.

    When the buyer sells the property or wants to re-pay the silent second loan, in addition to paying back the principal balance of the loan, the buyer may also be required to pay accrued interest, which is basically the interest expense that is incurred but not paid over the life of the loan. Silent second mortgages typically have a low interest rate, which is important because even though homeowners do not make monthly payments on the loan, you may be required to pay accrued interest when you sell or vacate property.

    The interest on a silent second mortgage typically does not compound, which means the accrued interest is the same every year and is always calculated based on the initial loan amount. For example, for a $50,000 silent second loan with a 3.0% interest rate, a constant $1,500 in interest is added to the silent second loan balance every year.  The annual interest charges are based on the initial $50,000 loan amount and not the higher loan balance that includes accrued interest for the prior years.

    Amortizing Loan.  Some  Community Seconds mortgages are structured as amortizing loans, which means you make regular monthly payments and pay off the loan over time.  This type of Community Seconds mortgage may have a lower interest rate to make the monthly payments for affordable.

    Combination Silent Second and Amortizing Loan.  With this type of Community Seconds mortgage the monthly payments are deferred for a certain period of time, such as five, ten or fifteen years, before changing to an amortizing mortgage with required monthly payments.  In some cases, borrowers sell the home or refinance their mortgage before they are required to start making payments on the Community Seconds mortgage.  Although borrowers are required to repay the Community Seconds mortgage when they sell the property or refinance, their property value may have increased which gives them more money to repay the Community Seconds loan.  Plus borrowers may have been able to save money because they are not required to make payments on the Community Seconds mortgage during the "silent" deferment period of the loan. 

    Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs including many no or low down payment options.

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  • Community Seconds Borrower Qualification Requirements
  • Although certain borrower qualification requirements for a Community Seconds mortgage may vary depending on the housing organization that administers the program, the general qualification guidelines for the program apply to all borrowers.  We outline the main qualification requirements below. 

    Maximum Loan-to-Value Ratio

    The Community Seconds program permits a maximum loan-to-value (LTV) ratio of 105% which means you can borrower more than the value of the property.  LTV ratio is the total amount of mortgages on a property divided by the value of the property.  For example, for a property valued at $100,000, you can borrow up to $105,000 in combined loan amounts for your first and second mortgages (LTV ratio $105,000 (total mortgages) / $100,000 (property value) = 105%).  In this case you could take out an $80,000 first mortgage and a $25,000 Community Seconds mortgage for a total loan amount of $105,000.  You can use the extra $5,000 that is above the property purchase price to pay for closing costs or property renovations.  

    Borrower Personal Financial Contribution

    If your loan-to-value (LTV) ratio is greater than 80%, no minimum borrower financial contribution is required as long as the property is a single unit residence.  This means you can qualify for the Community Seconds program and buy a home without contributing any of your personal funds.  If your LTV ratio is greater than 80% and the property you are buying is a two-to-four unit residence, you are required to make a minimum financial contribution of 5% from your own funds toward the purchase of the property.  If the LTV ratio is less than 80%, which is unusual for Community Seconds borrowers, no personal financial contribution is required, regardless of the number of units in the property. 

    Borrower Debt-to-Income Ratio

    Your debt-to-income ratio represents the percentage of your monthly gross income that you spend on debt expenses including your mortgage, property taxes and insurance and other debt such as credit card, car and student loans. For example, if you earn $3,000 per month in gross income and apply a debt-to-income ratio of 50%, you can spend $1,500 on monthly debt payments including your mortgage ($3,000 * 50% = $1,500). The higher the debt-to-income ratio, the higher the mortgage amount you qualify for. The debt-to-income ratio limit used for the Community Seconds mortgage program is usually determined by the guidelines for the first mortgage.  Debt-to-income ratio limits for first mortgages typically range from 43% to 50% and potentially higher for certain mortgage programs and borrowers.  Please note that debt-to-income ratio used depends on several factors including your credit score, financial profile and other factors.  Borrowers should work with the housing organization that is providing the Community Seconds loan as well as their first mortgage lender to determine the specific debt-to-income ratio that applies to them.

    Please note that if your Community Seconds mortgage payment is deferred for five years or longer, then the monthly payment for the loan is not included in your debt-to-income ratio.  If your Community Seconds payment is deferred for less than five years or not at all, then the monthly payment on the loan is included as debt in your debt-to-income ratio.

    Credit Score

    Similar to the debt-to-income ratio requirement, the credit score requirement for a Community Seconds mortgage is typically determined by the guidelines for the first mortgage. The minimum credit score required for most first mortgage programs ranges from 580 (FHA mortgage) to 620 (conventional and HomeReady mortgages) although certain programs permit lower credit scores or even borrowers with no credit score. Borrowers should work with the housing organization that is providing the Community Seconds mortgage as well as their first mortgage lender to determine the minimum credit score required.

    Borrower Income Limit

    Although Fannie Mae does not impose a borrower income limit for the Community Seconds program, many housing organizations that provide Community Seconds mortgages do limit how much money borrowers can make.  Additionally, the first mortgage program that you select may apply borrower income limits.  The income limit is usually based the area median income (AMI) where the property is located and borrowers are required to make less money than the income limit to be eligible for a Community Seconds mortgage.  Borrowers should contact the housing organization providing the Community Seconds loan as well as their first mortgage lender to understand if borrower income limits apply to them.

    Borrower Employment History Requirement

    Borrowers are typically required to have two years of continuous employment history to be eligible for the Community Seconds mortgage program. Please note that military service and full-time education typically count as employment history when you apply for a mortgage.

    Borrower Financial Reserves

    Depending on your first mortgage and Community Seconds program, borrowers may be required to hold a minimum amount of savings in reserve at the time your mortgage closes. For example, some programs require that borrowers hold at least two months of total monthly housing expense (mortgage payment, property taxes and homeowners insurance plus mortgage insurance and HOA dues, if applicable) as savings at the time their loan closes. For example, if your total monthly housing expense is $2,000, you would be required to have $4,000 in reserves when you mortgage closes and you may want to have more funds in savings as an additional financial cushion. Borrowers should work with the housing organization providing the Community Seconds loan as well as their first mortgage lender to understand the reserve requirements as they may be required to have additional funds to satisfy the requirement.

    First-Time Home Buyer

    Some Community Seconds programs are only available to first-time home buyers while other programs are also available to repeat home buyers.  Please note that in most cases a first-time home buyer is defined as someone who has not owned a home in the past three years, so you may qualify as a first-time buyer even if you previously owned a home.  

    Home Buyer Counseling Class

    Most Community Second mortgage programs require that applicants take a home buyer counseling class.   The class focuses on helping borrowers understand how mortgages work as well as the financial commitment required by owning a home.

  • Community Seconds Program Costs and Fees
  • Mortgage Rate

    In many cases the interest rate for a Community Seconds mortgage is lower than for a standard second mortgage and program guidelines state that the rate cannot be more than 2% higher than the interest rate on the first mortgage.  Additionally, the first mortgage lender cannot charge a higher mortgage rate to offset a lower rate for the Community Seconds mortgage.  The practice of charging a higher interest rate on the first mortgage to help pay for a lower rate on a second mortgage is known as premium pricing and ends up costing borrowers more money in the long run.  Premium pricing is prohibited according to Community Seconds program guidelines.

    The interest rate for your first mortgage depends on many factors including loan program, credit score and LTV ratio.  Borrowers with higher credit scores and lower LTV ratios typically pay lower mortgage rates while borrowers with lower credit score and higher LTV ratios typically pay higher mortgage rates.

    In some cases a Community Seconds mortgage is structured so that the program provider shares in any property value appreciation instead of charging interest on the loan.  In this case, the borrower may not realize the full gains from any increase in property value when they sell they property but they pay no interest or a reduced interest rate on the Community Seconds mortgage.  Be sure to work with your Community Seconds program provide to understand the interest rate, if any, for your loan.

    Extra Fees

    Community Seconds program applicants are usually required to pay a separate application fee to apply for the program and may be required to pay a fee to attend the home buyer counseling class.  Borrowers should work with the housing organization that is providing the Community Seconds mortgage to determine any extra fees upfront, prior to applying for the program.

    Private Mortgage Insurance (PMI)

    The guidelines for the first mortgage determine if borrowers are required to pay private mortgage insurance (PMI). Many but not all low or no down payment mortgage programs require borrowers to pay either an upfront or ongoing monthly (or both in some cases) mortgage insurance fee which is an additional expense on top of your mortgage closing costs and monthly payment.  Borrowers are typically required to pay PMI or another type of mortgage insurance if their loan-to-value (LTV) ratio is greater than 80%, although some mortgage programs do not require mortgage insurance.  Borrowers should work with the Community Seconds program provide and first lender to determine if they are required to pay PMI. 

    Impound Account

    Most Community Seconds mortgage programs require that borrowers pay their monthly mortgage payment, property taxes and homeowners insurance into an impound account on a monthly basis. An impound account is a trust account controlled by the lender from which housing expenses such as taxes and insurance are paid when due. The impound account does not change the amount of fees the borrower is required to pay for the mortgage.

  • Community Seconds Mortgage Type and Loan Amount
  • First Mortgage Program

    Community Seconds mortgage program guidelines mandate what type of first mortgage can be used with the program.  Only fixed rate mortgages and adjustable rate mortgages (ARM) with an initial fixed rate period of at least five years can be used with a Community Seconds loan.  Interest only mortgages are not eligible for the program.

    Loan Limit

    According to Community Seconds program guidelines, the loan amount for the first mortgage cannot exceed the conforming mortgage limit for the county in which the property is located. The conforming loan limit for a single family property is $484,350 in most counties and ranges up to $726,525 in high cost areas.

    Mortgage Type

    The Community Seconds mortgage program applies to home purchase loans and refinances where the borrower does not take out a significant amount of cash.

    Community Seconds Mortgage Program Property Eligibility

    The Community Seconds program applies to owner-occupied, primary residences such as a single-family home or condominium as well as two-to-four-unit properties as long as the borrower occupies one of the units.  Second homes, vacation homes and investment properties are not eligible for a Community Seconds loan.  Additionally, in some cases a borrower may only own one property to be eligible for the program.

  • Great Mortgage IdeaRelated FREEandCLEAR Resources

  • Sources

    Community Seconds Program Guidelines: https://www.fanniemae.com/content/fact_sheet/community-seconds-fact-sheet.pdf

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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