4204.2: Special requirements for Affordable Seconds® (11/01/17)

Affordable Seconds® must comply with the requirements of Section 4204.1(a) and the following requirements regardless of whether they are originated concurrently (i.e., the First Lien Mortgage and the Affordable Second are originated on the same day) or are being subordinated to the First Lien Mortgage in a refinance transaction.

SourceAn Affordable Second must be provided by an Agency under an established, ongoing, documented secondary financing or financial assistance program.With respect to the subject Mortgage, the Agency must not:
- Be the Seller or have participated in any aspect of the Mortgage origination process
- Be affiliated with, under contract to, or financed (directly or indirectly) by the Seller or any party that participated in the Mortgage origination process
For these purposes, "affiliated with" means that the Agency and the Seller or other party are related to each other as a consequence of one entity directly or indirectly controlling the other party, being controlled by the other party or being under common control with that party.
The source of the Affordable Second must not be the property seller or another interested party to the transaction.
Eligible First Lien MortgagesThe First Lien Mortgage must be:
- A fixed-rate Mortgage or an ARM with an initial fixed-rate period of five years or greater
- A purchase transaction or a "no cash-out" refinance, and
- Secured by a 1- to 4-unit Primary Residence
Maturity dateThe terms of the Affordable Second must not require a balloon payment due before the maturity or payment in full of the First Lien Mortgage.If the Affordable Second is an Employer Assisted Homeownership (EAH) Benefit, the terms of the secondary financing must permit the Borrower to continue making payments on the loan in the event the Borrower no longer works for the employer and may not require repayment in full unless:
- The Borrower terminates his or her employment for any reason, or
- The employer terminates the Borrower's employment for any reason other than long-term disability, the elimination of the employee's position or reduction-in-force
Scheduled paymentsThe interest rate of the Affordable Second must not be more than 2% higher than the interest rate of the First Lien Mortgage. Interest accruals, which are added to principal, may not increase the total loan-to-value (TLTV) ratio beyond the maximum TLTV ratio allowed for the First Lien Mortgage at any time during the term of the First Lien Mortgage.If monthly payments on the Affordable Second are required and begin before the 61st monthly payment under the First Lien Mortgage, such monthly payments must be included in the Borrower's monthly housing expense-to-income ratio and monthly debt payment-to-income ratio. If monthly payments on the Affordable Second begin on or after the 61st monthly payment under the First Lien Mortgage or if repayment of the entire Affordable Second amount is due only upon sale or default, the amount of the Affordable Second monthly payment may be excluded from both ratios.
Loan Product Advisor®When submitting a Mortgage with an Affordable Second to Loan Product Advisor®, the Seller may enter the amount of the Affordable Second in the "Total Gift Fund" field of Loan Product Advisor instead of entering it into the "Subordinate Amount" field, provided that:
- The Affordable Second does not require a payment before the Due Date of the 61st monthly payment, and
- It meets all the other requirements for an Affordable Second stated in Section 4204.2
Except for entering the Affordable Second amount into Loan Product Advisor as a gift, the Seller must include the Affordable Second as secondary financing in all circumstances, including:
- Calculating the TLTV ratio for delivery
- Complying with the delivery requirements in Section 6302.34
Participation in appreciation (equity sharing)When the terms of an Affordable Second permit the Agency to share in the appreciation of the Mortgaged Premises, the following requirements must be met:
- At the time of origination of the Affordable Second, the Agency's share of appreciation, as a percentage, must not exceed the principal amount of the Affordable Second divided by value, as defined in Section 4203.1 ("the percentage of the Affordable Second"), except as stated below. For example, if the Affordable Second amount is 5% of value, the maximum share of appreciation is 5%.
- The terms of the Affordable Second may permit the provider a share of appreciation exceeding the percentage of the Affordable Second if all of the following requirements are met:
  - The Agency must not charge interest on the Affordable Second
  - The Agency's share of appreciation must not exceed 75%
  - The Agency's share of appreciation must be reduced to the percentage of the Affordable Second, or below, within the first five years
  - The terms of the Affordable Second must allow the Borrower to recover all of the following before the Agency is able to share in the appreciation:
    The Down Payment paid from Borrower funds
    Customary costs incurred by the Borrower for selling the property
    Costs for improvements to the property that were allowed by the Agency or under the Agency's program
    The payments of principal of the First Lien Mortgage
Land Use RestrictionsAny Land Use Restrictions included in the Affordable Second documentation must:
- Be subject to and subordinate to the First Lien Mortgage, and
- Terminate upon payment in full of the Affordable Second, or
- Satisfy the requirements of Section 4201.17
Financing structureThe Affordable Second financing cannot be a HELOC.
Documentation requirementsThe Seller must include a copy of the following documentation for the Affordable Second in the Mortgage file:
- Note or other evidence of terms for the Affordable Second
- Settlement/Closing Disclosure Statement that evidences the fees and costs paid by the Borrower at closing in connection with a new Affordable Second
- For refinance transactions, evidence of subordination of an existing Affordable Second