FHA – Secondary Financing From a Private Individual

Question:

Can a seller offer secondary financing on an FHA Loan?

Answer:

Yes, this can be done. See the guidelines below for private secondary financing, keeping in mind the borrower’s required minimum down payment, which cannot be included in the financing. Also, make sure the base loan and the secondary financing combined do not exceed the Nationwide Mortgage Limits.

Reference:

FHA Secondary Financing (TOTAL)

Secondary Financing is any financing other than the first Mortgage that creates a lien against the Property. Any such financing that does create a lien against the Property is not considered a Gift or a grant, even if it does not require regular payments or has other features forgiving the debt.

4) Private Individuals and Other Organizations (TOTAL)

(a) Definition
Private Individuals and Other Organizations refer to any individuals or entities providing secondary financing that are not covered elsewhere in this Secondary Financing section.

(b) Standard
FHA will insure a first Mortgage on a Property that has a second Mortgage or lien held by private individuals and other organizations, provided that:

• the secondary financing is disclosed at the time of application;
  no costs associated with the secondary financing are financed into the FHA-insured first Mortgage;
• the secondary financing payments must be included in the total Mortgage Payment;
• the secondary financing must not result in cash back to the Borrower except for a refund of earnest money deposit or other Borrower costs paid outside of closing;
• the secondary financing may not be used to meet the Borrower’s MRI;
  the CLTV ratio of the Base Loan Amount and secondary financing amount must not exceed the applicable FHA LTV limit;
• The base Loan Amount and secondary financing amount must not exceed the Nationwide Mortgage Limits;
• the second lien may not provide for a balloon payment within 10 years from the date of execution;
• any periodic payments are level and monthly; and
• there is no prepayment penalty after giving the Mortgagee 30 Days advance notice.

Any secondary financing meeting this standard is deemed to have prior approval in accordance with 24 CFR § 203.32.

Subscribers have access to the FHA Secondary Financing Chart, which is on the ‘Charts & Checklist’ page under ‘FHA.’