Buying a home often requires a significant down payment, which can be a major obstacle for many aspiring homeowners. A soft second mortgage serves as a valuable financial tool to bridge this gap, making homeownership more accessible.
How Does a Soft Second Mortgage Work?
A soft second mortgage is a subordinate loan taken in addition to your primary mortgage. It primarily covers your down payment and sometimes closing costs, allowing you to purchase a home with minimal upfront cash. This type of loan typically has “soft” terms such as deferred payments, no or low interest rates, and potential forgiveness, especially when offered by state or local housing agencies and nonprofits.
Your primary mortgage handles the bulk of the home financing, while the soft second mortgage acts as support by funding initial costs.
What Makes It “Soft”?
The “soft” aspect refers to the loan’s lenient terms compared to traditional loans:
- Deferred Payments: Payments may be postponed for several years, or until the home is sold or refinanced. This is often called a “silent second” since it does not require monthly payments upfront.
- Loan Forgiveness: Many soft seconds are partially or fully forgiven if the homeowner lives in the property for a specified period, such as 5 to 15 years.
- Low or No Interest: Rates are commonly set at 0% or a minimal amount, preventing the loan balance from increasing over time.
Practical Example
For instance, if a homebuyer needs a $15,000 down payment but has only $5,000 saved, a soft second mortgage could cover the remaining $10,000. If the loan terms include 20% forgiveness per year over five years, living in the home that long would eliminate the entire secondary loan balance.
Who Offers Soft Second Mortgages and Eligibility
These loans are mainly provided by:
- State and local housing finance agencies (HFAs)
- Municipal governments
- Nonprofit organizations
- Some employers
Eligibility criteria often include income limits, first-time homebuyer status, home price caps, and completion of a homebuyer education course. For helpful guidance, see our article on Down Payment Assistance Programs.
Important Considerations
- Repayment Triggers: Selling, refinancing, or moving out can require immediate repayment of any remaining loan balance if forgiveness conditions aren’t met.
- It’s a Lien: The soft second mortgage is recorded as a lien on your home, impacting sale or refinancing.
FAQs
What’s the difference between a soft second and a hard second mortgage?
A soft second features flexible repayment terms and possible forgiveness, while a hard second mortgage requires regular payments and typically accrues interest immediately.
Can I refinance if I have a soft second mortgage?
Refinancing requires agreement from the soft second lender, a process called resubordination. Some lenders allow this; others do not.
For more detailed information on eligibility and assistance options, visit the Consumer Financial Protection Bureau’s page on Down Payment Assistance.
By leveraging a soft second mortgage, many buyers overcome the initial financial barrier to homeownership with manageable and sometimes forgivable loan terms.
