FHA Mortgage Guidelines:  For the Professional

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FHA Secondary Financing

Secondary financing (subordinate liens) are only allowed on owner occupied property.  The Borrower may receive the entire required cash investment of 3.5% (i.e., both down payment and closing costs) from the following types of organizations:

  1. Federal, state and local governmental agencies (including city funded programs).
  2. Non-profit agencies considered “Instrumentalities of Government” that have received their “official approval status” from FHA.
    • These non-profit agencies will be shown as an “Approved Non-Profit” in the HUD website, “The FHA Connection.” (If the non-profit agency is not listed in this website, they are NOT approved to provide subordinate financing (a secured loan) to a Borrower.)
    • The non-profit agency MAY be allowed to provide either a gift or a grant to the Borrower, however, even if they are not a HUD-approved agency. If the agency has a TAX ID# showing they meet the IRS requirement for tax-exempt status, they may provide either a gift or a grant to the Borrower for purchase of a home. The funds given to the Borrower will be listed on the application as a “gift” and there will be no lien placed on the property by the agency, and the gift cannot be repaid.
  3. Family Members: If family members (defined as parents, grandparents or children) provide a 2nd mortgage to the Borrower, the terms of the loan must meet HUD requirements.

Other types of organizations or private individuals may also provide 2nd mortgage financing, but only after the borrower has already made their 3.5% investment (between the down payment and closing costs).  These organizations and/or individuals may be:

  • Governmental agencies;
  • Non-profit agencies;
  • Family members; Family members (parents, grandparents, children) may provide a 2nd mortgage to Borrower – which may be secured or unsecured. If there is repayment on the loan, the payment must meet HUD restrictions shown below. The loan may be constructed so as no repayment is required at all or at least until the property is refinanced or sold.

The 2nd mortgages must meet the following conditions:  The combined 1st and 2nd mortgages do not exceed the maximum loan amount calculations for the transaction OR the statutory limit for the state and county in which the property lies.  

Second mortgage requirements:  Must have equal payments made on a monthly basis. The 2nd mortgage payment cannot exceed the 1st mortgage payment.

2nd mortgage note must not have:  Any balloon payment(s) in the first five (5) years of the term.  The Borrower qualifies for the payment of the 2 mortgages as well as the other debt he pays monthly.



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