Definition:
A soft second loan is a secondary mortgage that typically has low or no interest and may be deferred or forgiven over time. It’s often used to help homebuyers cover down payments or closing costs.
Example:
Julia wants to buy her first home but doesn’t have enough money for the full down payment. She qualifies for a local housing program that offers a soft second loan of $20,000. She doesn’t have to make payments on this loan unless she sells the house or moves out within 10 years.
Explanation:
Soft second loans are commonly offered by government agencies, nonprofit organizations, or housing assistance programs to make homeownership more affordable. These loans "sit behind" the primary mortgage and are considered subordinate—meaning they get paid back only after the first mortgage if the home is sold or foreclosed.
The “soft” part refers to the favorable terms. These loans may:
- Have no monthly payments
- Charge little or no interest
- Be deferred (payments start later)
- Be forgiven if certain conditions are met, such as living in the home for a specific number of years
Soft seconds are often used in conjunction with traditional loans to help first-time buyers meet required down payments or closing costs. The assistance can make buying a home possible for those who otherwise couldn’t afford it.
Why is Soft Second Loan Important in Real Estate Transactions?
For buyers, especially first-timers or those with limited savings, soft second loans can bridge the gap between what they can afford and what lenders require. They make homeownership more accessible and reduce upfront financial pressure. Understanding how these loans work helps buyers plan long-term and ensures they meet the requirements needed to keep the loan deferred or forgiven—making it a valuable tool in affordable housing strategies.