What is a Soft Second Mortgage?
The Soft Second Mortgage is an unconventional method of helping low-income families purchase homes that would otherwise be outside the range of their available budget. These loan products are created and maintained by a combination of government assistance organizations and private lending institutions. Plus, a great many Soft Second Mortgage have provisions stipulating that the entire remaining balance of the loan may be forgiven if the buyer meets certain qualifications after a certain number of years.
In an effort to increase the percentage of citizens who own homes, the government has made certain funds available for such programs. To boost their approval in the community and leverage marketing techniques, private lenders will participate in such programs despite the significant lack of profit.
How Does It Work?
This loan program is offered to home buyers who meet criteria set by the government and agreed to by the lenders. The government will usually provide the buyer with just over 20% of the property’s purchase price (to avoid PMI), in the form of an interest-only loan. Most of the time, there is no principle due until after 10 or 15 years. In some cases, the government programs will even pay those interest payments for that period.
Additionally, the main lender will usually decrease the interest rate of the primary mortgage for the qualifying borrower. This method allows for more citizens to purchase homes that they would otherwise be unable to afford, plus it enhances to public image of both the government and the mortgage company. Lenders are comfortable with such programs because they realize these second mortgage payments are being made by the government and are therefore guaranteed.
What’s the catch?
The concept of the Soft Second Mortgage is entirely legal and legitimate. However, since free government money is being used to fund the home’s purchase, plus the fact that the mortgage lender is losing profit by charging interest rates that are usually below the going market rate, there are some rules that the buyer is required to follow.
Most of the time, the buyer is restricted to the purchase of only those properties deemed acceptable and appropriate by the government. Also, the homeowner is very often required to attend regular meetings regarding the basics of home ownership, wherein they learn fundamentals of financing and maintenance.
