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B5-5.1-02, Community Seconds Loan Eligibility (05/03/2023)


This topic contains information regarding Community Seconds loan eligibility, including:


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  B3-4.3-08, Employer Assistance);
  • 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  B5-5.3-03, Shared Equity Transactions: Eligibility, Underwriting and Collateral Requirements  and B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements.


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. 


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.

Criteria Requirements
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  Eligibility Matrix 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 B5-5.3-03, Shared Equity Transactions: Eligibility, Underwriting and Collateral Requirements.


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 B5-5.1-01, Community Seconds Loans, is not required; however, the subordinate lien must meet all RD Guidelines. See B6-1-05, Eligible RD-Guaranteed Mortgages 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.
Greater than 80% 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 B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements, 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.


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.

Note date: May 

First payment date: July

First Mortgage Community Seconds Loan
UPB $150,000 $30,000
Interest rate 5% 7%
Maximum accrued, deferred interest July NA $175.00 ($30,000 @ 7% /12)
Scheduled principal payment July $180.23 NA



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.


Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2023-04 May 03, 2023


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