Can a private individual or other organization provide a second mortgage for the buyer's down payment?

Generally, only Federal, State, local government, and nonprofit agencies considered instrumentalities of government are considered an acceptable source of funds for the borrower’s required minimum cash investment, and may provide the funds for secondary financing. 

Private Individuals and Other Organizations refer to any individuals or Entities providing secondary financing which are not covered elsewhere in the Secondary Financing section.

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 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 Minimum Required Investment (MRI);
• the Combined Loan-to-Value (CLTV) ratio of the Base Loan Amount and secondary financing amount must not exceed the applicable FHA Loan-to-Value (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. 

The Mortgagee must obtain from the provider of any secondary financing:  
• documentation showing the amount of funds provided to the Borrower for each transaction; and 
• copies of the Mortgage and Note.    

For additional information on Secondary Financing see Handbook 4000.1 II.A.4.d.iii(J)(4) or II.A.5.c.iii(J)(4) available at:

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-04221