Secondary financing is any financing that results in a lien against the property apart from the FHA-insured first mortgage. This financing is not considered a gift, even if it comes without any provisions for monthly repayment (known as a “soft” or “silent” second), or includes measures for debt forgiveness. The amount of the secondary financing must be documented by the provider and indicate all transactions of funds given to the borrower. Copies of the loan instruments must also be added to the endorsement binder.
If a borrower participates in a down payment assistance secondary financing program, the costs from participation may only be included in the second lien amount. The FHA may reject a secondary financing if it does not serve the borrower’s needs, or if the costs to the participants are believed to be greater than the benefits to the homebuyer.
Government agencies at the federal, state and local levels can provide secondary financing, as can nonprofit agencies defined as government “instrumentalities,” to go towards the whole cash investment of the borrower.