If you don’t have enough cash saved for your down payment and closing costs, a Community Seconds loan could help you become a homeowner a lot sooner.
Community Seconds mortgages let eligible homebuyers finance their down payment, closing costs, and even home renovations.
If you qualify, you could finance over 100 percent of your home’s purchase price, cover your down payment and closing costs, and pay nothing upfront.
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Community Seconds mortgages help eligible homebuyers avoid paying their closing costs and/or down payment out of pocket.
But where does this additional money come from? It’s a second home loan.
Your second mortgage — the one that covers your down payment — would be a lot smaller than your first loan which covers the sales price of the home.
Lenders use loan-to-value ratio (LTV) to measure your loan’s size as compared to your home’s value. When you put 3 percent down, your LTV is 97 percent.
With Community Seconds, your combined loan-to-value ratio (CLTV) could reach as high as 105 percent.
Normally, an LTV above 100 percent isn’t allowed because you’re financing more than the home is worth. But Community Seconds makes a special exception. Therefore, borrowers can finance their down payment and closing costs instead of paying upfront.
For example, say you were buying a $250,000 home and putting 3 percent down. Your down payment would be $7,500. Let’s say your closing costs are another $7,500, meaning you’d need $15,000 in cash at closing.
For this example we’ll also assume you have saved $5,000 but need help paying the other $10,000 to become a homeowner.
- Your first mortgage loan amount would be $242,500 (the purchase price minus your down payment)
- Your Community Seconds loan of $10,000 would cover the down payment and part of your closing costs
- Your own $5,000 in cash would pay the rest of the closing costs
You’d borrow a total of $252,500, which is 101 percent of the home price. Ordinarily you wouldn’t be able to borrow more than 97 percent of your home value.
Repayment of your second loan may be structured in several ways:
- You may make monthly fixed monthly payments — along with payments on your first loan — until the second loan is repaid
- You may be allowed to defer (put off) repayment of your second loan for some period. Then, you make fixed monthly payments until the loan is repaid
- You may not have to make payments at all. The second loan is only repaid if you sell the property or refinance
- You may not have to repay the loan if you remain in your home for a specified number of years
Your repayment plan will depend on the source of your Community Seconds loan. These loans vary a lot by location and loan program.
If repayment is deferred for five years or more, the second mortgage payment is not counted when the lender calculates your debt-to-income ratio.
You could put money from a Community Seconds or Affordable Seconds loan toward your down payment or closing costs. That’s how most borrowers use these loans.
But you could also use the money to finance home improvements or renovations if you’re buying a home that needs some sprucing up.
You could even use the money to buy discount points, which lower the interest rate on your primary mortgage for the life of the loan.
But you couldn’t put the money toward a co-op or an investment property unless it’s a multi-unit property that you’ll be using as your primary residence while renting out the other units.
Community Seconds is a specific type of closing cost and down payment assistance loan that’s offered through Fannie Mae, a government-sponsored enterprise that regulates conventional loans.
Community Seconds works only with a HomeReady conventional loan from Fannie Mae. You can use it with an adjustable-rate or a fixed-rate conventional mortgage. If you’re getting an ARM, it’s initial fixed-rate period must be at least five years.
You cannot pair a Community Seconds loan with a VA, USDA, or FHA mortgage, or a loan from Freddie Mac.
However, Freddie Mac operates a similar program called Affordable Seconds which you could pair with Freddie’s Home Possible loan.
And if you need a VA, USDA, or FHA loan, you still have plenty of options for down payment assistance. Check out our state-by-state guide to DPA programs for all loan types.
FHA even has a fixer-upper program, called the FHA 203k loan, that allows you to purchase a run-down property and renovate it all with a single mortgage.
Most Community Seconds lenders exclude borrowers who earn too much income. Commonly, homebuyers can’t qualify if they earn more than 120 percent of their Area Median Income (AMI).
Some loan programs may also be limited to first-time homebuyers, and require some form of homebuyer education class or counseling. You must also be using the home you’re buying as a primary residence.
And, some programs require higher credit scores than typical first mortgage loans since you’d be borrowing more than the home’s value.
For example, you may need a credit score of 640 for Community Seconds even though most conventional loans require only a score of 620.
Every loan provider has its own specific requirements, so once you find the down payment assistance programs for your area, you’ll need to check their guidelines to see whether you’d qualify.
Example: North Carolina
North Carolina’s Community Partners Loan Pool, for example, provides up to 20 percent of the purchase price as a homebuyer assistance loan. Repayment is deferred, and the interest rate is zero.
To be eligible, buyers’ income cannot exceed 80 percent of the AMI for their county.
To qualify, the borrower’s FICO score must be at least 640. The new mortgage PITI payment (principal, interest, taxes, and insurance) cannot exceed 32 percent of the borrower’s gross (before-tax) income.
So a borrower in Franklin County, with a two-person household, would have an income limit of $3,900 per month. The maximum PITI mortgage payment at that income would be $1,248.
Example: San Francisco
San Francisco is a very expensive city in which to buy or rent. Its City Second Loan Program is designed to help buyers with down payments and closing costs.
The interest rate is zero, and repayment is deferred. You pay only if you rent out, sell, or refinance the home.
Only properties in certain communities (the program maintains a list on its website) can be financed under this program. Maximum second mortgage loan amount is $375,000.
Borrower income cannot exceed 120 percent of the AMI for San Francisco. For 2021, that’s $160,320 a year for a two-person household.
This program does require the buyer to make a down payment of 5 percent. Grants or gifts can equal 2.5 percent, and 2.5 percent must come from the borrower’s own funds.
Finding your affordable housing programs
You can see from the above examples that these second mortgage programs can be very different.
An online search for “community second mortgage in (your city, county or state)” will bring up programs offered by your local housing departments.
You can also search HUD’s State Pages. Click your state, then “Homeownership Assistance,” and you’ll get a list of links and contact information for many programs.
To find your area’s median income, check Fannie Mae’s lookup tool.
Community Seconds mortgages can help you become a homeowner sooner, even if you don’t have enough cash for a down payment or closing costs.
That’s a big plus. But there are some drawbacks to consider:
- Higher LTV: LTV stands for loan-to-value ratio. When you have a higher LTV, you owe a larger amount of your home’s value to your lender. A high LTV could make refinancing your home more difficult, especially if you want to do a cash-out refinance later
- Two monthly payments: Some programs require fixed monthly payments for both your primary mortgage and your second mortgage. Typically, the second mortgage payment lasts only five or 10 years and is much smaller than your main payment
- Higher credit qualifications: Community Seconds lenders may increase your minimum credit score requirement since they’re risking more with the higher combined loan-to-value ratio (CLTV) that results from a having two home loans
- Income requirements: These programs are designed for low- to moderate-income homebuyers which means some first-time homebuyers earn too much to qualify
- Borrower requirements: Many second loan programs require the borrower to bring at least some money to the closing table. Usually, the minimum requirement is measured as a percentage of the home sales price
Even with these cons, you can still benefit if the Community Seconds loan offers a shortcut to homeownership.
But another shortcut may work better for you. Many loan types let you use gift money as a down payment. Or, some communities offer grants or tax rebates that could help cover your down payment.
Community Seconds mortgages come from many different sources, including:
- Federal agencies
- Municipalities, counties, and state governments
- Local housing finance agencies
- Nonprofit organizations
- Employer Assisted Mortgage (EAM) programs
- A federally recognized Native American tribe
- A regional Federal Home Loan Bank branch
If you’re not sure where to start, ask your loan officer or real estate agent.
What are today’s mortgage rates?
Mortgage rates for home loans with Community Seconds or Affordable Seconds are still very low. Combining the two mortgages can get you into a home you can afford with little or nothing out-of-pocket.