soft second loan

Case Study A program developed by Massachusetts state government and private partnerships uses soft second loans to increase affordable housing opportunities for low- and moderate-income first-time homebuyers. Funds obtained through the program can be used to secure financing from private-sector lenders that charge reduced closing costs and accept a modest down payment. The program works by breaking the total mortgage amount into a first mortgage and a subsidized interest-only second mortgage. Splitting the mortgage allows the borrower to avoid private mortgage insurance. The first mortgage can be for up to 77% of the purchase price, while the second mortgage and down payment make up the remaining 20% and 3%, respectively. The subsidy for the second mortgage is gradually phased out over ten years, after which the borrower begins making payments on the total principal and interest. The borrower is responsible for repaying the subsidy if the home is resold within five years of its purchase. Repayment is limited to the lesser of the subsidy or 20% of the net appreciation if the borrower lives in the home for five years or longer.