Types of Down Payment Assistance

The forgiveness feature of the “soft second” mortgage is conditional, not automatic. The requirement is 36 consecutive on-time payments on your first mortgage. If you make a payment that is 30 days or more delinquent during this period, you do not default on the second mortgage, but the forgiveness timer resets to zero. You must then begin a new streak of 36 consecutive on-time payments to re-qualify for forgiveness. This “reset” provision remains available for the entire 30-year term of the loan, giving you multiple opportunities to earn forgiveness if you experience temporary financial difficulty early in the loan.

“High Balance” loans are FHA mortgages that exceed standard conforming loan limits but fall within the ceiling for high-cost areas. The Chenoa Fund offers distinct assistance types for these transactions. You can utilize the Repayable Second Mortgage (10-year term) for High Balance loans at either the 3.5% or 5% assistance level. However, if you prefer the Forgivable option, it is only available for High Balance loans at the 3.5% assistance level. The 5% forgivable option is strictly prohibited for High Balance transactions. This distinction ensures risk management while supporting borrowers in expensive housing markets.

A frequent question is whether the assistance is a “gift” or a “grant.” Technically, the Chenoa Fund provides assistance in the form of a second mortgage, not a grant. This means you will sign a Note and a Deed of Trust (or Mortgage) for the assistance amount at closing. It becomes a lien against your property. However, if you select the Forgivable option and meet the payment requirements (36 consecutive on-time payments), the loan is forgiven, effectively acting like a grant in the long run. If you fail to meet the conditions, the lien remains a debt you owe.

Understanding the terms regarding refinancing is crucial before accepting assistance. If you refinance your first mortgage before the assistance loan is forgiven or paid off, you will typically be required to repay the down payment assistance in full. For forgivable loans, refinancing the first mortgage usually triggers a “clawback” where the loan permanently loses its forgivable status. In such cases, even if you don’t pay it off immediately, it becomes a standing debt that must eventually be repaid. Subordination (keeping the second loan in place behind a new first loan) is generally not allowed during the initial 36-month period.

It is a common misconception that Chenoa Fund down payment assistance can be paired with USDA loans. While CBC Mortgage Agency offers a USDA Rural Development 30-year loan program, it is a standalone first mortgage product. Secondary financing, or down payment assistance, is not permitted with this specific USDA offering. The USDA loan itself allows for 100% financing, meaning no down payment is essentially required by the program structure itself. Therefore, if you choose the USDA path, you will not receive the separate 3.5% or 5% second mortgage funds for closing costs that are available with the FHA program.

The Rate Advantage program is a specific pricing option often mentioned in marketing that pairs competitive first mortgage interest rates with down payment assistance. While standard assistance options might come with higher interest rates on the first mortgage to offset costs, Rate Advantage aims to keep the primary housing payment lower. This option typically offers both 3.5% and 5% assistance levels. However, unlike the standard repayable products which may have no income caps, Rate Advantage often adheres to stricter qualifying criteria, such as Area Median Income (AMI) limits (often capped at 135% AMI) and higher minimum credit score requirements.

Borrowers can generally choose between two levels of assistance: 3.5% or 5% of the home’s purchase price or appraised value, whichever is lower. The 3.5% option is specifically calibrated to cover the Minimum Required Investment (MRI) for an FHA loan, effectively allowing for zero-down financing. The 5% option provides additional funds that can be applied toward closing costs and prepaid items in addition to the down payment. While both amounts are available for repayable and forgivable products, restrictions apply to the 5% forgivable option regarding high-balance loans, so checking specific loan limits with your lender is essential.

The Forgivable Second Mortgage, often called a “soft second,” offers down payment assistance with no monthly payments and a 0% interest rate. This lien has a 30-year term but is designed to be forgiven much earlier. Under current guidelines, the loan balance is forgiven after you make 36 consecutive, on-time payments on your FHA first mortgage. If you make a late payment during this period, the timer resets, and you must start a new 36-month streak. This option is ideal for buyers planning to stay in their home for at least three years and who prioritize lower monthly obligations.

The Repayable Second Mortgage is a fully amortizing loan designed for borrowers who can afford a monthly payment but lack upfront cash. Typically structured with a 10-year term, this option requires you to make monthly principal and interest payments until the balance is satisfied. The interest rate on this second mortgage is generally set 1% higher than the rate on your FHA first mortgage. One of the primary benefits of this option is that it typically has no income limits, making it accessible to moderate-to-high income earners, and it permits “High Balance” loan amounts for both assistance levels.

The Chenoa Fund primarily offers down payment assistance in the form of a second mortgage paired with an FHA-insured first mortgage. There are two distinct structures available to borrowers: the Repayable Second Mortgage and the Forgivable Second Mortgage. The Repayable option functions as a standard loan with monthly payments, while the Forgivable option (often called a “soft second”) has no monthly payments and a 0% interest rate. Both types allow you to borrow either 3.5% or 5% of the home’s value. Borrowers choose between these options based on their income, credit profile, and long-term plans for staying in the home.