California Down Payment Assistance Second Mortgage
In order to help stabilize home values and ensure down payment assistance programs continue to remain available and affordable to California homebuyers, assistance funds can be structured as a down payment assistance second mortgage, which is secured as a lien against a new home.
These types of second mortgage can be referred to by different names, but are conceptually the same. These names include down payment assistance second mortgage, a silent second mortgage, or a soft second mortgage. Fannie Mae refers to second mortgages as Community Seconds. Freddie Mac refers to second mortgages as Affordable Seconds.
The funds for these types of second mortgages can be provided by federal agencies, state and county housing agencies, local municipalities, nonprofit organizations, or employers. The eligibility requirements for most of them are provided by Fannie Mae or Freddie Mac.
Additional eligibility requirements:
- The funds will be used for down payment assistance and/or closing costs.
- The property must be a principal residence. In other words, the person receiving the assistance will live in the property once they buy it.
- The property must be a residential property. This is to say that it is designed for one to four family members to live in the property.
- The maximum combined loan to value of the first mortgage and the silent second does not exceed 105%.
- The source of the funds for the second mortgage is not the seller of the property or another interested party to the transaction.
The reason that these types of second mortgages are referred to as a silent second is because they typically have a zero interest or very low interest requirement (ex. up to 2%), and do not require monthly payments. Also, many times, silent seconds are forgiven over time. If repayment of the loan is required, the repayment requirement usually doesn’t happen until the home is sold or the mortgage is refinanced.
Details of the Second Mortgage
If you are getting down payment assistance structured as a second mortgage, you need to be very careful that you read and understand the details, terms, and conditions of the transaction. They can be quite different depending on how the provider of the funds chooses to structure the down payment assistance second mortgage.
Examples of these differences include:
- the lien may or may not accrue interest,
- the lien may or may not be forgiven over time,
- the lien may or may not require that you and the provider of the funds share in any appreciation in the value of your home.
This type of down payment assistance should not be confused with a grant that does not require repayment.
California Programs That Create Second Mortgages
One of the most popular down payment assistance programs in California – Golden State Finance Authority (GSFA) Platinum Program – have structured their funds as soft second mortgages on the property being purchased. All three have chosen to structure the silent second in the following manner:
- 0% interest rate
- no monthly payments
- three-year term
- forgiven monthly at a rate of 1/36 over the term of the lien
- the second mortgage is 100% forgiven after three years.
- if the home was sold or refinanced before the three years, the non-forgiven amount of the lien will be paid back to the provider of the funds.
As mentioned, the reason that there may be a period of time that the lien is required to be repaid is because one of the main goals of the program is to help stabilize home values and ensure that the down payment assistance program continues to be available and affordable to California home buyers.
