Down Payment Assistance as a Second Loan: Forgivable and Deferred Loans

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: some government agencies and nonprofits give down payment or closing cost help as a second mortgage instead of a grant. The loan may be forgiven over time if you keep living in the home, or it may be deferred until you sell, refinance or move out. If the loan charges no interest, is forgiven or deferred in a way the rule lists, and has only limited costs at closing, federal rules let the creditor give you a shorter disclosure instead of the Loan Estimate and Closing Disclosure. It is still a lien on your home, so read when it becomes due. This page covers federal law only; other rules may apply where you live. It is general information, not legal or financial advice.

What this kind of loan is

The CFPB says that local nonprofit or government organizations can sometimes offer you a second mortgage on special terms to replace a down payment, and that borrowing your down payment increases your overall debt and your monthly payments (CFPB, last reviewed April 3, 2024, read October 30, 2026; this page may be out of date). HUD’s FHA rules say that any financing other than the first mortgage that creates a lien against the property is secondary financing, not a gift or grant, even if it does not require regular payments or has features forgiving the debt (HUD Handbook 4000.1, II.A.4.d, Secondary Financing, HUD, Update 18 issued August 12, 2026, read October 30, 2026).

Type	How repayment works	What to watch
Forgivable	Part or all of the balance is forgiven at set dates while you meet ownership and occupancy conditions	What is still owed if you sell, refinance or move out before the end
Deferred	No payments until a set date, a sale, or when the home is no longer your main home	The full balance comes due at that event
Repayable	Regular monthly payments	The payment adds to your monthly housing cost

The partial exemption from mortgage disclosures

Regulation Z exempts a transaction from the Loan Estimate and Closing Disclosure rules (unless the creditor chooses to give them) and from the home loan booklet rule in 1026.19(g) when it meets all of these conditions (12 CFR 1026.3(h), eCFR, text up to date as of October 28, 2026, read October 30, 2026):

It is secured by a subordinate lien, such as a second mortgage.
Its purpose is down payment, closing cost or similar home buyer help (such as principal or interest subsidies), rehabilitation, energy efficiency, or foreclosure avoidance.
The credit contract does not require the payment of interest.
Repayment is forgiven, in part over time or in whole, at a date certain and subject only to ownership and occupancy conditions; or deferred for at least 20 years after closing, until the home is sold, or until it is no longer your principal dwelling.
Costs you pay at closing are limited to recording fees, transfer taxes, a bona fide and reasonable application fee, and a bona fide and reasonable housing counseling fee, and the application and counseling fees together are less than 1 percent of the loan amount.
You get either the Truth in Lending disclosures in 1026.18 or the Loan Estimate and Closing Disclosure.

The official comments say the no-interest and forgiveness or deferral terms must be in the loan contract, that the creditor must keep evidence that the closing costs met the limit, and that the exemption does not remove other Regulation Z requirements that apply (Supplement I, comments 3(h)-1 and 3(h)-2, eCFR). Regulation X has a matching partial exemption: its booklet, good faith estimate, settlement statement and servicing disclosure rules in 1024.6, 1024.7, 1024.8, 1024.10 and 1024.33(a) do not apply to a loan that meets the 1026.3(h) criteria (12 CFR 1024.5(d)(2), eCFR). If a second loan charges interest or has other closing costs, the partial exemption does not apply, and the regular disclosure timing rules do; see when a mortgage application starts.

Example: forgiveness and the 1 percent cost limit

This example is only for the math, with an example price, loan and fees, not terms from any program or lender. A buyer of a $300,000 home gets a no-interest second loan of 3.5% of the price, or $10,500, forgiven 20% at the end of each full year over 5 years if they keep the home as their principal dwelling.

Item	Example
Second loan: 3.5% of $300,000	$10,500
Forgiven each full year: $10,500 / 5	$2,100
Forgiven if the home is sold after 2 full years: $2,100 × 2	$4,200
Still owed at that sale: $10,500 − $4,200	$6,300
1 percent of the loan amount	$105
Application fee $50 + counseling fee $50	$100, under $105: meets the limit
Application fee $50 + counseling fee $75	$125, not under $105: does not meet the limit

If the same loan were instead deferred until sale, the full $10,500 would be due at the sale. Your program’s papers may forgive in a different way, such as monthly or all at once at the end, so check the exact dates.

Ability-to-repay rule

The ability-to-repay and qualified mortgage rules in 12 CFR 1026.43(c) through (f) do not apply to credit made under a program administered by a housing finance agency, or by certain creditors: a Community Development Financial Institution, a downpayment assistance through secondary financing provider designated under 24 CFR 200.194(a), a Community Housing Development Organization under the HOME program, or a 501(c)(3) nonprofit that meets limits (12 CFR 1026.43(a)(3)(iv)-(v), eCFR). For the nonprofit, the limits are that in the prior calendar year it made no more than 200 dwelling-secured loans and lent only to low- and moderate-income households, that your income is within that limit, and that it decides under written procedures that you can reasonably repay (1026.43(a)(3)(v)(D)). No-interest, forgiven or deferred second loans for home buyer help, with costs under 1 percent, are not counted toward the 200-loan limit (1026.43(a)(3)(vii)). Other creditors making a dwelling-secured second loan must follow the rule; see the mortgage ability-to-repay rule.

FHA rules on the second loan

For an FHA first mortgage, HUD will insure it with a second lien from a government agency or instrumentality, or from a nonprofit on HUD’s Nonprofit Roster, if, among other conditions, the second loan is disclosed at application, no costs of the second loan are financed into the FHA loan, its payments are counted in your total mortgage payment, it gives you no cash back apart from a refund of your earnest money or other costs you paid outside closing, and it has no balloon payment within 10 years (HUD Handbook 4000.1, II.A.4.d.iii(J)). Government second loans may count toward your minimum required investment; nonprofit second loans may not, and there is no maximum combined loan-to-value for either. The Handbook asset section carries the date November 10, 2026, which is after our read date, so ask the lender which version applies. See FHA mortgage insurance premiums.

Other ways to cover a down payment

A private second loan used to avoid mortgage insurance is a different product with interest and payments; see piggyback second mortgages. For an unsecured loan, see using a personal loan for a down payment. A second loan to buy your home is not covered by the right to cancel, because the right excludes a residential mortgage transaction (12 CFR 1026.23(f)(1), eCFR).

Questions to ask the program

Is this a grant or a loan, and will it be recorded as a lien on my home?
Does it charge interest, and is any payment due each month?
When is it forgiven, and on which dates does each part of the forgiveness happen?
What makes the balance due: a sale, a refinance, renting the home out, or moving out?
Is there any recapture or shared appreciation on a sale, and how is it figured?
Will you subordinate the loan if I refinance my first mortgage later?
Which disclosures will I get, and what fees are due at closing?

Checklist

Get the second loan note and mortgage before closing and read the repayment terms.
Tell your first mortgage lender about the second loan at application.
Put the forgiveness dates on your calendar.
Keep proof that the home stays your principal dwelling if the terms require it.
Ask for a payoff figure in writing before you sell or refinance.

Programs may require homeownership counseling. To find housing counseling agencies that HUD has vetted, use the CFPB housing counselor search; see also the homeownership counseling list. You can submit a complaint at consumerfinance.gov/complaint.

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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.

Down Payment Assistance Given as a Second Loan