Combining Community Seconds with a 97% LTV mortgage allows homebuyers to cover down payments and closing costs with minimal out-of-pocket expenses. A 97% LTV (Loan-to-Value) first mortgage requires only 3% down, and Community Seconds—subordinate loans from approved entities—can bridge that 3% gap, often pushing the Combined LTV (CLTV) up to 100% or even 105%. This strategy helps make homeownership accessible for low-to-moderate income buyers by providing deferred, forgivable, or low-interest financing.
What Is a Community Seconds Loan?
Community Seconds® is a term coined by Fannie Mae to describe subordinate financing layered with a first mortgage to cover:
- Down payment
- Closing costs
- Renovation expenses
- Interest rate buydowns
These secondary loans are usually:
- Deferred, forgivable, or low-interest
- Offered by state/local housing finance agencies, nonprofit organizations, or employers
- Designed to make homeownership more accessible, particularly for low- to moderate-income buyers
What Is a 97% LTV Mortgage?
A 97% LTV mortgage is a conventional loan where the borrower provides just 3% down. Common loan programs include:
- Fannie Mae HomeReady®
- Freddie Mac Home Possible®
- State HFA Preferred™ programs
These loans offer:
- Reduced mortgage insurance
- Lower interest rates
- Flexible credit requirements
- Eligibility for down payment assistance or Community Seconds layering
Key Concept: When you combine a 97% LTV first mortgage with a Community Seconds loan, the total financing can go up to 105% Combined Loan-to-Value (CLTV).
How Layering Works: A 97% LTV Example
Let’s walk through a realistic example of how a borrower could layer financing.
Scenario:
- Home price: $300,000
- First mortgage (97%): $291,000
- Community Seconds (3%): $9,000
- CLTV: 100% (no cash required from borrower)
In some cases, a Community Seconds loan can even exceed 3% of the purchase price—helping with closing costs, escrow, or rate buydowns.
Alternate Example (105% CLTV):
- Home price: $300,000
- First mortgage (97%): $291,000
- Community Seconds (8%): $24,000
- CLTV: 105%
This structure is permitted under Fannie Mae’s Community Seconds guidelines, provided all funds are used for eligible purposes.
Fannie Mae Guidelines for Community Seconds
Fannie Mae allows Community Seconds loans to be paired with its eligible first mortgage products. Key requirements include:
| Requirement | Fannie Mae Standard |
| Max CLTV | Up to 105% |
| Eligible First Mortgage | HomeReady, Standard 97%, HFA Preferred |
| Second Mortgage Terms | Fixed rate, no more than 2% above first mortgage |
| Repayment Options | Forgivable, deferred, or fully amortizing |
| Occupancy | Must be primary residence |
| Income Limits | Varies by program; often capped at 80%-120% of AMI |
| Lender | First mortgage lender must approve layered structure |
Eligible Community Seconds Providers
Only specific entities are allowed to provide these subordinate loans under agency guidelines. These include:
- State Housing Finance Agencies (e.g., CHFA, NJHMFA, TSAHC)
- Local housing or community development agencies
- Nonprofit organizations (often HUD-approved)
- Employer assistance programs
- Native American tribes or tribally designated housing entities
Private individuals or for-profit lenders generally cannot offer Community Seconds under these guidelines.
Real-World Structuring Examples
Example 1: Colorado HFA + 97% First Mortgage
- Home price: $350,000
- First mortgage (97%): $339,500
- CHFA DPA (3% forgivable): $10,500
- CLTV: 100%
- Buyer owes zero at closing, assumes no second lien payments if forgiveness terms are met.
Example 2: New Jersey First-Gen Buyer
- Home price: $325,000
- First mortgage (97%): $315,250
- NJHMFA DPA ($15K) + First-Gen Grant ($7K): $22,000
- CLTV: Over 103%
- Funds used to pay down rate, closing costs, escrow, and minor repairs
Key Considerations for Structuring Community Seconds
1. Purpose of Funds
The second lien must be used for:
- Down payment assistance
- Closing cost coverage
- Rate buydown
- Repairs or accessibility improvements
2. No Cash to Borrower
Proceeds from the second lien cannot be given to the buyer as cash. They must go directly toward the transaction.
3. Repayment Type
Choose based on your timeline and financial goals:
- Forgivable loans reward buyers who remain in the home
- Deferred loans offer flexibility with future repayment
- Amortizing seconds work when cash flow allows monthly payments
4. Income Limits
Many Community Seconds programs cap borrower income at 80% to 120% of Area Median Income (AMI). Check your local HFA guidelines.
Common Pitfalls to Avoid
- Incorrect CLTV Calculation: Total of all liens cannot exceed 105%. Be precise.
- Unapproved Lender/Source: Only qualified entities can offer Community Seconds.
- Non-Primary Residence: You must occupy the home. No second homes or rentals.
- Incomplete Documentation: The second lien must be fully disclosed, with loan terms spelled out in closing documents.
Steps to Successfully Layer Community Seconds
1. Start with a Housing Finance Agency (HFA)
Research programs in your state (e.g., CHFA, NJHMFA, TSAHC) to find available assistance options.
2. Get Pre-Approved for a 97% Mortgage
Ask your lender about HomeReady, Home Possible, or state-specific mortgage products that allow Community Seconds layering.
3. Verify Eligibility
Check income limits, credit score minimums (typically 620+), occupancy rules, and homebuyer education requirements.
4. Structure the Deal
Work with your lender to layer the Community Seconds over your first mortgage. Ensure the CLTV stays under 105%.
5. Complete Homebuyer Education
Most programs require a HUD-certified course before closing. This ensures you understand homeownership responsibilities.
Who Benefits Most From Layered Financing?
- First-time homebuyers who need down payment help
- Moderate-income families in high-cost housing markets
- Public servants (teachers, nurses, veterans) accessing special grant or loan options
- Households without generational wealth or financial gifts
Layered Community Seconds allow these buyers to enter homeownership sooner, while keeping savings intact and minimizing risk.
97% LTV + Community Seconds
| Loan Type | Amount | Source | Use of Funds | Repayment |
| First Mortgage (97%) | $291,000 | Lender (e.g., HomeReady) | Purchase price | Monthly payments |
| Community Seconds (3%) | $9,000 | State HFA or nonprofit | Down payment, closing costs | Deferred or forgivable |
Final Thoughts
Layering a Community Seconds loan over a 97% LTV first mortgage is one of the most effective ways to become a homeowner with little or no upfront cash. When done correctly, it offers:
- Immediate affordability
- Long-term sustainability
- Flexibility with payment and repayment
- A smoother path into homeownership