A forgivable mortgage is a type of subsidy that makes it easier for a low-income homebuyer to purchase a house. A forgivable mortgage is similar to a grant, but it provides funds over a period of several years, rather than a lump sum cash payment. Government agencies and nonprofit organizations may offer forgivable mortgages to help residents purchase houses and revitalize an area. In spite of similarities across programs, each program will have its own specific conditions and guidelines.
Features
A forgivable mortgage is a type of second mortgage. This mortgage is much smaller than the first mortgage on the house. The main purpose of a forgivable mortgage is to provide additional funds for a homebuyer who doesn't have the money to make a standard 20 percent down payment on a house. The homebuyer has to meet the qualifications for the first mortgage, other than the down payment, to receive a forgivable mortgage.
Time Frame
Forgivable mortgages have a short term. Some forgivable mortgage may only last for five years, unlike the first mortgage, which may be a 30-year mortgage. The forgivable mortgage allows the homeowner to build up equity, so that he has the minimum amount of equity needed to qualify for a standard mortgage when the forgivable mortgage ends.
Geographic Restrictions
Forgivable mortgages are only available in certain areas. An agency may offer forgivable mortgages after a major disaster destroys most of the homes in an area, such as the parts of New Orleans that Hurricane Katrina destroyed. A city may also provide forgivable mortgages to encourage new residents to move to a blighted section of town that has many abandoned and foreclosed homes.
Compliance
Offering a forgivable mortgage instead of a grant ensures that the homeowner complies with the program conditions throughout the life of the mortgage. Many forgivable mortgages decrease proportionally; therefore, for a five-year forgivable mortgage, the city can forgive 20 percent of the mortgage each year. If the homeowner violates the terms of the agreement, the forgivable mortgage operates as a standard mortgage, and the homeowner has to make the mortgage payments.
Restrictions
Forgivable mortgages may include other conditions to prevent abuse. A city may state that forgivable mortgages are only available for fixed rate, 30 year mortgages, not adjustable rate mortgages or mortgages that require balloon payments. The forgivable mortgage terms may state that the home owner must live in the house for the entire term of the mortgage, and must repay the city if she sells the house.
