Community Seconds And Affordable Seconds: How They Can Help Finance Your Home Loan
Kevin Graham6-minute read
April 27, 2021
Coming up with the down payment and closing costs for a mortgage is one of the biggest challenges for a home buyer in achieving homeownership. There are various ways to help with this challenge, including gifts and grants. Today, we’ll be discussing the Community Seconds program from Fannie Mae.
Very similar to its counterpart, the Affordable Seconds program from Freddie Mac, Community Seconds are another way to come up with the funding to buy a home. Although Rocket Mortgage® doesn’t offer home loans utilizing these programs at this time, we’ll use this post to go over eligibility requirements and how the programs work.
What Are Community Seconds?
The Community Seconds program allows lenders to accept loans from sources like the community, nonprofits and employers as a source of funding for closing costs as well as down payment assistance. Finally, they can be used for interest rate buydowns or property renovations.
Community Seconds are a second or subordinate mortgage. Depending on the terms of the program you qualify for the loan through, this subordinate mortgage may feature deferred payment or be forgivable in certain circumstances.
Although Fannie Mae doesn’t purchase Community Seconds directly, they do set eligibility requirements for using the funds as an asset toward qualification for the primary mortgage they purchase under the program.
Community Seconds Vs. Affordable Seconds
In addition to the Community Seconds option from Fannie Mae, Freddie Mac has a nearly identical Affordable Seconds mortgage program. These guidelines also allow for the payment of down payment and closing costs through various community, nonprofit and employer loan sources.
Although the programs have basically the same goals and many of the same eligibility requirements, there may be cases in which Community Seconds lender options vary slightly when compared to lender options for Affordable Seconds.
How Community Seconds And Affordable Seconds Work
Before we get into eligibility and exactly how you qualify, let's take a step back and discuss exactly how Community Seconds and Affordable Seconds work.
Subordinate Mortgages 101
Subordinate mortgages are loans that serve as secondary financing to your primary mortgage. Both Community Seconds and Affordable Seconds are subordinate mortgages.
The mortgage is considered subordinate because if a borrower were to default on the loan and the lender had to take the home back to sell it to try and pay off the loans, the proceeds of the sale go toward paying off the primary mortgage first. The second, or subordinate, mortgage is paid off with whatever funds are left over, if any.
Like your primary mortgage, a second mortgage functions as a type of lien. While the lien gives the lender a claim to your property, as soon as your obligations are satisfied under the loan, the lien is removed. This lien removal process is repeated when your primary mortgage is paid off.
The Application Process
In terms of the application process, much of it will be the same. You’ll need to have your credit checked and share documents related to income. You’ll also disclose any assets you might have for a down payment, closing costs and reserves in the event of a loss of work or a major unplanned expenditure that could impact your ability to continue to make your mortgage payment.
The major difference is that you’ll have to find someone willing to give you subordinate financing that’s eligible for either the Community Seconds or Affordable Seconds programs. Additionally, you’ll need to find a lender who works with these programs to help with your home loan financing. At this time, this isn’t something offered by Rocket Mortgage.
In general, interest rates on second mortgages are going to be higher than you would see on a primary mortgage. This is because the backer of subordinate financing gets paid after the primary mortgage is paid off. While they get any funds that are left over, there's a good chance that may be nothing. The higher interest rate compensates for the higher risk involved.
While the above certainly remains a possibility with Community Seconds or Affordable Seconds, it may not be the case. As we’ll get into in a couple of sections, the reality is that Fannie Mae and Freddie Mac will accept subordinate financing from under these programs are often nonprofits, governments and employers looking to provide homeownership resources. Because there’s no profit motive, interest rates are often lower.
The lower interest rates on the subordinate financing can make this an attractive option for low-income families. The lower the interest rate, the more affordable the payment.
Depending on the type of the subordinate financing you receive, there may be one of several repayment options. Let's run through them:
- Periodic payments: This is the most traditional form of financing. You make payments in installments, often monthly.
- Deferred payment: Payments may be delayed until a later date or paid when you sell the house depending on the terms of the deferral.
- Forgiveness: Sometimes all or part of the debt due under the subordinate mortgage may be forgiven. There are generally terms to meet associated with the forgiveness. For example, community organizations may forgive the mortgage if you live in the house for a certain period of time. An employer may wipe away debt after a number of years of service.
Acceptable Community Seconds Lenders
There are several sources of funding from which you’re able to get a Community Second that you can use for down payment and closing costs on a Fannie Mae mortgage. Here’s the list:
- Federal agency
- County or parish
- State or local housing finance agency
- Nonprofit organization
- Affordable housing programs of a regional Federal Home Loan Bank
- Native American tribe or its sovereign assistance program or agency
There are a couple of restrictions in that the second loan can’t be funded in any way based on the first mortgage. For example, you can’t take a higher rate in exchange for not making a down payment.
Eligibility For Community Seconds
Now that we've gone through a how Community Seconds work and where you can find funding, let's run through some of the major eligibility requirements.
In order to use a Community Seconds loan toward your down payment, closing costs, renovation funds or a permanent interest rate buydown, the home has to be a 1 – 4-unit primary residence. This means it has to be in the home in which you spend the majority of your time throughout the year.
Community Seconds are for loans backed by Fannie Mae. This is an important distinction. Although they’re both conventional loans, loans backed by Freddie Mac can receive assistance under the Affordable Seconds program. There are separate requirements for that option that you should be sure to discuss with your lender.
Combined Loan-To-Value (CLTV)
Combined loan-to-value ratio takes a look at the value of all your mortgages compared to the value of your home. In the case of Community Seconds, the CLTV can’t be higher than 105%. In this case, the 5% over and above the amount your home is worth would be the maximum loan that can be given toward your down payment and closing costs.
Another point to consider in this area is whether you will need to bring your own funds to the table even with a community second. With a 1-unit property, Fannie Mae never requires you to do so. However, with a 2 – 4-unit property, you need to bring at least 5% of your own funds to closing if your LTV is above 80%.
While Fannie Mae has no prescribed limits on income level for a loan financed in part through Community Seconds, it’s worth noting that the organization giving you the second mortgage rates have limits on income if part of their mandate is to use the program to fund housing for people with low or moderate incomes. Pay close attention to program terms.
Since Community Seconds accompany loans backed by Fannie Mae, they follow the general credit score requirements of conventional loans. That means you need a median FICO® Score of at least 620.
Beyond that, entities giving you a loan for the Community Second may have requirements for your credit score in order to give them confidence that you can pay the loan back. The lender for your primary mortgage may also have their own credit restrictions.
The Bottom Line: Don't Let A Down Payment Get In Your Way
Down payment assistance programs ease the path to homeownership for many borrowers. Programs like Community Seconds and Affordable Seconds allow you to take advantage of loans from certain organizations like nonprofits or your employer to be used toward things like your down payment or closing costs. Rocket Mortgage doesn’t do these loans at this time.
As useful as they are, Community Seconds aren’t the only from closing cost assistance available. If you buy a HomePath property, a foreclosure sold by Fannie Mae, you need only a 3% down payment and can get the 3% closing cost assistance. With a HomeReady or Home Possible, you could have flexible options for funding down payment and closing costs as well as competitive interest rates.
If you feel you’re ready to get started, go ahead and apply for a mortgage online or give us a call at (833) 326-6018.
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