What Community Seconds Loans Are and Who Provides Them
A Community Seconds loan is subordinate financing that helps make homeownership more affordable. Think of it as a second mortgage designed specifically to help buyers who need assistance with down payments or closing costs.
The key difference from regular second mortgages is who can provide the money. Only specific types of organizations qualify as Community Seconds providers. These include federal, state, and local government agencies, housing finance agencies, 501(c)(3) nonprofit organizations, Federal Home Loan Banks through their affordable housing programs, and your employer if they offer housing assistance.
Your employer can provide a Community Seconds loan directly, or a regular lender can provide one if your employer guarantees it as part of their affordable housing program. Indian tribes on the federal list can also provide these loans.
The provider cannot be the property seller or have a financial interest in the sale, with one exception: shared equity or sweat equity programs where the provider has an ongoing stake in the property's future value.
How You Can Use Community Seconds Funding
Community Seconds loans serve four main purposes. You can use the funds for all or part of your down payment, as long as the money doesn't come indirectly from your first mortgage through premium pricing or rebates.
The loan can cover closing costs, which includes everything from appraisal fees to title insurance. You can also use it for renovations, including energy-efficient improvements that add value to the home.
A permanent interest rate buydown is another allowed use. This means paying points upfront to reduce your first mortgage rate for the entire loan term.
Some Community Seconds loans work differently and don't involve cash changing hands at closing. Instead, the provider might arrange for you to buy the home at below market value. The difference between market value and your purchase price becomes the loan amount, typically with deferred payments that may be forgiven over time.
Loan Limits and Property Requirements
Your first mortgage must be either fixed-rate or an adjustable-rate mortgage with at least five years of fixed payments initially. The combined loan-to-value ratio can reach 105% when you add the Community Seconds loan to your first mortgage.
The property must be your primary residence with 1-4 units. Manufactured homes are eligible but must meet all Fannie Mae manufactured housing requirements, including specific LTV and CLTV limits.
You can use Community Seconds loans for purchases or limited cash-out refinances. If you're refinancing, the current Community Seconds lender must sign a resubordination agreement, putting their loan back in second position behind your new first mortgage. This agreement must be recorded to be legally enforceable.
If both your Community Seconds provider and first mortgage lender impose income limits, you must meet the stricter requirement.
Down Payment Requirements From Your Own Money
The down payment rules depend on your loan-to-value ratio and property type. For single-family homes, you don't need to contribute any of your own money regardless of the LTV ratio. The Community Seconds loan can cover everything needed to complete the transaction.
For 2-4 unit properties with LTV ratios above 80%, you must contribute at least 5% from your own funds. After meeting this requirement, the Community Seconds loan can cover the remaining down payment and closing costs.
Say you're buying a $300,000 duplex with 5% down ($15,000). You need to contribute $15,000 from your own savings to meet the 5% requirement. A Community Seconds loan could then provide additional funds for closing costs or other eligible expenses.
Repayment Terms and Interest Rate Rules
Community Seconds loans offer flexible repayment structures. The loan can require regular monthly payments from day one, or payments can be deferred for a period before switching to monthly payments. Some loans defer all payments until you sell the home or the loan matures.
Debt forgiveness over time is also allowed. Your employer can require immediate full repayment if your employment ends voluntarily or involuntarily, except for disability-related terminations.
The loan must mature no earlier than 15 years from your first mortgage note date or when your first mortgage matures, whichever comes first. The interest rate cannot exceed your first mortgage rate by more than 2 percentage points.
If payments are deferred for five years or more, lenders don't count the Community Seconds payment in your debt-to-income ratio. If the deferral period is less than five years, they must include the payment amount that will be required after the deferral ends.
When Negative Amortization Is Acceptable
Community Seconds loans cannot allow negative amortization by design, but it can occur when interest accrues on a deferred payment loan. This is acceptable under specific conditions.
The monthly interest that gets deferred cannot exceed your first mortgage's scheduled principal payment for that same month. Interest must accrue on a simple-interest basis at a fixed rate, not compound.
Here's an example: Your first mortgage has a $180 scheduled principal payment in July. Your Community Seconds loan accrues $175 in deferred interest that month. This works because $175 is less than $180.
The deferred interest becomes due when you sell the property, refinance, pay off the first mortgage, or default on either loan.
Special Situations and Documentation
Rural Development Section 502 Leveraged Loan Program subordinate liens automatically qualify as Community Seconds loans. These don't need the standard Community Seconds program review but must meet all Rural Development guidelines.
Properties in community land trusts or with income and resale restrictions have additional requirements beyond the standard Community Seconds rules. These typically involve ongoing affordability requirements that survive the original buyer.
Your lender must report Special Feature Code 118 when delivering your first mortgage to Fannie Mae, along with any other applicable codes. The good news is that loan-level price adjustments for subordinate financing don't apply to Community Seconds loans.
Common Issues That Complicate Approval
The biggest challenge is often proving your Community Seconds provider qualifies under Fannie Mae rules. Not every government program or nonprofit organization automatically qualifies. Your lender needs to verify the provider's eligibility before proceeding.
Timing can create problems with refinances. The resubordination agreement must be signed and recorded before your new first mortgage closes. If the current Community Seconds lender won't cooperate or delays signing, your refinance could fall through.
Interest rate coordination between your first mortgage and Community Seconds loan requires careful planning. If your first mortgage rate changes after you've locked your Community Seconds rate, you might violate the 2% maximum spread rule.
Income limits imposed by different programs can conflict. You might qualify under your employer's program but exceed the limits for a local housing authority program. Understanding which limits apply requires reviewing all program requirements upfront.
References
For the official guidelines, see B5-5.1-02: Community Seconds Loan Eligibility in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B5-5.1-02, Community Seconds Loan Eligibility (05/03/2023)
Additional Eligibility Requirements
Rural Development Section 502 Leveraged (Blended) Loan Program
Minimum Borrower Contribution Requirements
Eligible Community Seconds Providers
A Community Seconds loan must only be funded by one of the following entities:
a federal agency, state, county, or similar political subdivision of a state;
any city, town, village, or borough of a state that
has a local government and that has been created by a special legislative act,
has been otherwise individually incorporated or chartered pursuant to state law, or
is recognized as such under the constitution or by the laws of the state in which it is located;
a housing finance agency as defined in 24 C.F.R. §266.5;
a nonprofit organization exempt from taxation under Section 501(c)(3) of the Internal Revenue Code;
a regional Federal Home Loan Bank under one of its affordable housing programs;
an employer where a borrower is an employee (see );
a lender, only in connection with an employer-guaranteed Community Seconds loan as part of its affordable housing program; or
an Indian tribe on the most current list published by the Secretary of the Interior pursuant to 25 U.S.C. §5131.
Note: A corporation or other legal entity created by or owned in whole or in part by such an Indian tribe is not eligible unless it qualifies as a Tribally Designated Housing Entity, as defined in 25 U.S.C. §4103(22).
A Community Seconds provider must not be the property seller or other interested party in the transaction, except when they are the provider of a shared equity program or sweat equity program. See
and .
Acceptable Uses
A Community Seconds loan must be used to fund one or more of the following:
all or part of the down payment, provided the Community Seconds loan is not funded in any way through the first mortgage, such as premium pricing;
closing costs;
renovations to the property (including energy-related improvements); or
a permanent interest rate buydown.
In some cases, a Community Seconds loan may not involve the advancement of funds, but instead may facilitate affordability through a subsidized sales price and/or requirements related to the future sale of the home. The eligible provider may secure a Community Seconds loan against the property representing the difference between the market value and reduced sales price accepted by the seller (referred to as the subsidy). Typically, the subordinate loan has deferred payments and may be forgiven. The subordinate loan may also enforce requirements that prevent the borrower from selling the property outside of the confines of the program. The terms of the loan may not, however, restrict the sale of the property upon foreclosure or acceptance of a deed-in-lieu of foreclosure.
When a subsidy is provided, the lender may use the Affordable LTV calculation described in .
When a subsidy is provided and the property has resale restrictions that limit both income eligibility and impose a maximum resale price, the provisions in Section B5-5.3, Shared Equity Transactions also apply.
Additional Eligibility Requirements
The following table provides additional eligibility requirements for Community Seconds loans originated in connection with a first mortgage purchased by Fannie Mae.
First mortgage eligibility
The first mortgage must be fixed-rate or an ARM with an initial fixed-rate period of five years or more, and otherwise comply with this Guide.
Maximum LTV and CLTV ratios
The maximum LTV is based on the first mortgage LTV requirement.
The maximum CLTV is 105% with a Community Seconds loan, unless the first mortgage has an independent CLTV cap (such as the CLTV cap for manufactured housing that does not meet MH Advantage requirements). Refer to the
for additional information.
Loan purpose
The transaction is limited to a purchase or limited cash-out refinance.
For a limited cash-out refinance, the Community Seconds mortgage holder must acknowledge their lien position by executing a resubordination agreement. The agreement must be recorded to ensure enforceability.
Property and occupancy
The subject property must be a one- to four-unit principal residence.
If the loan is secured by a manufactured home, it must comply with all manufactured home policies including LTV and CLTV ratio requirements.
Income limits
If income limits are imposed by both the Community Seconds provider and the first mortgage, the more restrictive will apply.
Note: Loans secured by community land trusts properties and properties with income and resale price restrictions have additional requirements. See
.
Rural Development Section 502 Leveraged (Blended) Loan Program
A subordinate lien originated in connection with a conventional first mortgage under the RD Section 502 Leveraged (Blended) Loan Program is eligible for the Community Seconds program. The standard review of Community Seconds programs described in
, is not required; however, the subordinate lien must meet all RD Guidelines. See for additional information.
Minimum Borrower Contribution Requirements
The following table describes the minimum borrower contribution requirements for transactions with a Community Seconds loan.
LTV, CLTV, or HCLTV Ratio
Minimum Borrower Contribution Requirement from Borrower's Own Funds
80% or less
One- to four-unit principal residence
A minimum borrower contribution from the borrower's own funds is not required. All funds needed to complete the transaction can come from a Community Seconds loan.
One-unit principal residence
A minimum borrower contribution from the borrower's own funds is not required. All funds needed to complete the transaction can come from a Community Seconds loan.
Two- to four-unit principal residence
The borrower must make a 5% minimum contribution from their own funds. After the minimum borrower contribution has been met, a Community Seconds loan can be used as described in Acceptable Uses above.
Note: See
, for additional information about minimum borrower contribution and down payment requirements, including sweat equity requirements, for HomeReady loans.
Repayment Structure
Repayment of the Community Seconds loan may be structured in any number of ways provided the terms are consistent with those Fannie Mae considers acceptable. This includes:
requiring fully amortizing, equal monthly payments;
deferring payments for some period before changing to fully amortizing, equal monthly payments;
deferring payments over the entire term, unless the loan is paid off or the property is sold before the maturity date of the loan; or
forgiving debt over time.
When the borrower's employer is the provider of the Community Seconds loan, the financing terms may provide for the employer to require full repayment of the debt if the borrower's employment is terminated (either voluntarily or involuntarily, for reasons other than those related to disability) before the maturity date of the Community Seconds loan.
When repayment is required, the maturity date of the Community Seconds loan, or the due date of any balloon payment on the Community Seconds loan, cannot be before the earlier of:
15 years after the note date of the first mortgage, or
the maturity date of the first mortgage.
When repayment of the Community Seconds loan is deferred for five years or more, a lender is not required to include a monthly payment for the Community Seconds loan in its calculation of the borrower's debt-to-income ratio. When repayment is deferred for fewer than five years, the lender must include the monthly payment amount that will be required after the end of the deferral period in its calculation.
The Community Seconds loan must be a fixed-rate loan and the interest rate may not be more than 2% (200 basis points) higher than the initial note rate of the first mortgage.
Note: Interest that is imposed as a penalty should the loan be declared in default and called due and payable under its terms is not subject to this interest rate cap.
The Community Seconds loan may not allow for negative amortization, however, because negative amortization will occur if the interest rate is greater than zero and the payment of interest is ever deferred, negative amortization will be acceptable provided:
the amount of scheduled monthly interest deferred on the Community Seconds loan for any full calendar month within the initial five years (of the Community Seconds loan) may never exceed the scheduled monthly principal payment of the first mortgage for that month (see below for an example);
interest is accrued on a simple-interest basis at a fixed rate; and
the accrued interest is fully deferred until
sale or transfer of the property,
the loan is refinanced or the first mortgage is paid in full, or
declaration of an event of default under the subordinate note or the security instrument.
Example
In the following example, the first mortgage is eligible for purchase by Fannie Mae as the amount of deferred, accrued interest for July on the Community Seconds loan is less than the scheduled principal payment for the first mortgage for the same month.
$150,000
$30,000
5%
7%
$175.00 ($30,000 @ 7% /12)
$180.23
Pricing and Delivery Considerations
Special Feature Codes and Other Reporting
The lender must report SFC 118 and all other applicable special feature codes when it delivers a first mortgage that is originated as part of a Community Seconds transaction.
Loan-Level Price Adjustments
Loan-level price adjustments otherwise applicable to subordinate financing do not apply.
