Application Information for Downpayment Assistance through Secondary Financing Providers

Information by State  Esta página en español  Print version  Email this to a friend   Related Information Hud has a list of secondary financing - DAP providers. You can check the lists to find a provider in your community. Nonprofit or government agencies that would like to submit an application for approval of a secondary financing or DAP program, please send it to the HUD homeownership center that serves your state.

HUD has long recognized the important role that nonprofit agencies play in providing affordable housing opportunities. This homepage will facilitate approval of downpayment assistance through secondary financing programs and will permit nonprofit and government agencies greater flexibility in providing downpayment and other assistance to prospective homeowners through secondary financing.

Please note: HUD does not approve “gift” programs administered by charitable organizations and, thus, will not offer a formal approval of your program. Mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable organization meets the instructions described in HUD Handbook 4155.1 REV-4, CHG-1 Paragraph 2-10(C) (e.g., no repayment implied, etc.). Those charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible homebuyers and do not need prior FHA approval to do so.

Our website postings will only show downpayment assistance programs that are considered secondary financing and have been approved by FHA. "Secondary financing" generally constitutes second mortgages or liens, with or without monthly mortgage payments, that may or may not be forgiven by the provider of those funds. Secondary financing can be used for the downpayment, closing costs, prepaid expenses, or any combination of these.

Non-profit organizations, government entities, and private individuals may provide secondary financing under the following conditions:

The sum of all financing may not exceed 100% of the cost to acquire the property plus any normal prepaid expenses. The Department is aware that all of the borrowers prepaid expenses normally paid for in cash at closing are often paid by the government agency provider of the secondary financing and included in the second loan. This may result in the sum of the first and second exceeding the 100% maximum loan-to-value by these costs. It is our policy to allow the sum to exceed the 100% by these costs only, when those funds were provided by a government agency provider. In no instances may this result in cash back to the borrower. Please read HUD Mortgagee letter 2002-22 for more information on Downpayment Assistance Programs Operated by Governmental Agencies and Nonprofits Using Subordinate Financing.

Nonprofit agencies that are not considered an instrumentality of government can provide secondary financing but the borrower is required to make a cash investment of at least 3% of the cost to acquire the property. HUD Guidelines (HUD Handbook 4155.1 REV-4 CHG-1 Paragraph 1-13) allow the nonprofit to provide a gift of this cash investment but no repayment of the gift may be expected or implied. Please note, in some instances a grant may require repayment which is not acceptable.

Eligible nonprofit agencies may be permitted to provide secondary financing provided the borrower has made or will make at settlement a cash investment of at least equal to three percent of the cost to acquire the property. The cash investment requirement may also be satisfied with grant funds provided under the HOME Investment Partnerships program. The secondary financing arrangements are also subject to the restrictions of HUD Mortgagee Letters 94-2, 96-18, 02-22 as well as those detailed in HUD Handbook 4155.1 REV-4 CHG-1 Paragraph 1-13(c), as follows:

1. The combined amounts of the first and second mortgages do not exceed the applicable loan-to-value ratio and the maximum mortgage limit for the area.

2. The repayment terms of the second mortgage must not provide for a balloon payment before ten years (or other such term acceptable to FHA), unless the property is sold or refinanced, and must permit prepayment by the borrower, without penalty, after giving the lender 30 days advance notice.

3. The required monthly payment under both the insured mortgage and the second mortgage or lien, plus other housing expenses and all recurring charges, cannot exceed the borrower's reasonable ability to pay. Any periodic payments due on the second mortgage are due monthly and are substantially the same in amount.

4. The required monthly payment under both the insured mortgage and the second mortgage or lien, plus other housing expenses and all recurring charges, cannot exceed the borrower's reasonable ability to pay;

5. The second mortgage when combined with the first may not exceed the estimated value of the property including all closing costs;

6. The source, amount, and repayment terms must be disclosed in the mortgage application and the borrower must acknowledge that he or she understands and agrees to those terms. If the secondary financing includes restrictions on transferability under the new rule, such as occupancy requirements or resale restrictions, those requirements must comply with the new rule (as discussed below). Permitted restrictions may be enforced by requiring repayment of the secondary financing. The secondary financing itself is not a restriction under the rule merely because it is due on sale of the home.

Federal agencies and government-sponsored enterprises (e.g., the Federal Deposit Insurance Corporation (FDIC), the Federal National Mortgage Corporation (Fannie Mae), the Resolution Trust Corporation (RTC), the Federal Home Loan Mortgage Corporation (Freddie Mac)) that administer affordable housing programs may also provide secondary financing under the terms described above.

Borrowers 60 years of age or older may borrow the required cash investment for purchasing a principal residence, provided:

1. The donor or tender is a relative of the borrower, a close friend with clearly defined interest in the borrower, the borrower's employer, or an institution established for humanitarian or welfare purposes.

2. The donor or lender is not one whose interest is solely in the sale of the property, such as a builder or seller, or any person or organization associated with them.

3. The principal amount of the insured mortgage loan, plus the note or other evidence of indebtedness in connection with the property, may not exceed 100 percent of the value plus prepaid expenses.

4. The note or other evidence of indebtedness may not bear interest exceeding that of the insured mortgage.