The Quick Read: A grant forgives nothing at sale or refinance, because nothing is owed. A forgivable second forgives only what its schedule has already released. In the forgivable option Lendmire arranges, that means the full amount is forgiven after the first 36 or 60 on-time payments on your first mortgage, depending on the term you pick. Sell or refinance before that point and the second is still a loan, so it has to be dealt with.
Here is the honest sorting. A grant fits the buyer who wants no lien, no payoff line and no future conversation at the closing table. It comes with an income test, a homebuyer education course and an FHA-only first mortgage. A forgivable second fits the buyer who does not meet the grant’s test, or needs a different first mortgage, and who is confident about staying put. It adds a recorded lien that can complicate a move. Both are part of the wider family of down payment assistance programs. Both apply only to a primary residence you will live in. Neither works for a rental or a second home.
Side-by-Side
The table compares the two options as arranged through wholesale lenders, subject to program guidelines and full underwriting. A repayable second sits in the third column as a contrast.
| Factor | Grant | Forgivable second | Repayable second |
|---|---|---|---|
| Size | 2% or 3.5% of price | 3.5% of lesser of price or value | 3.5% or 5% of lesser of price or value |
| Repayment | Nothing to repay | Forgiven after 36 or 60 on-time payments | Monthly payment, balloon in year 10 |
| Lien on the home | None | Recorded second lien | Recorded second lien |
| Credit floor | 620 | 640 (660 blended) | 660 (670 blended) |
| Income test | 140% of area median, or a qualifying category | None beyond USDA’s own on a USDA loan | None beyond USDA’s own on a USDA loan |
| First-lien pairing | FHA only | FHA plus rural and tribal loan programs | FHA plus rural and tribal loan programs |
| Counseling | Homebuyer education required | Not required | Not required |
Two notes on the table. First, no option requires you to be a first-time buyer. Repeat and move-up buyers qualify. Being a first-time buyer is just one of several categories that satisfy the grant’s income test. Second, nothing here stacks with another assistance program.
Key Terms Defined
Grant. Assistance with nothing to repay. It is released at closing and creates no lien, no payment and no interest.
Forgivable second. A second loan secured against your home, with no interest and no monthly payment. It is wiped out if you meet the schedule.
Second lien. A claim on your home that ranks behind your main mortgage. It must be settled before the home can be sold or the main loan replaced.
Subordination. The second lender’s written agreement to stay behind a new first mortgage after a refinance.
Payoff letter. A statement from a lender showing exactly what is owed on a lien as of a given date.
Blended score. A qualifying credit score that averages in a lower-scoring co-borrower. It applies to the second-lien options only, and only when the higher-scoring borrower earns at least 60% of household income.
When a Grant Is the Better Fit
The grant wins whenever you might move or refinance sooner than you expect. There is no lien, so there is no payoff line when you sell. There is also nothing to ask a second lender to subordinate when you refinance. The home behaves like any other FHA-financed home.
Who it fits:
- Buyers who meet the income test. Household income at or below 140% of area median income qualifies. So does any one of the qualifying categories: first responders, educators, medical workers, civil servants, military personnel, first-time buyers, or a purchase in an underserved census tract.
- Buyers who can live with the paperwork. A homebuyer education course is required. You pay for it up front, and the cost is credited back at closing.
- Buyers with a 620 score and a conventional-looking FHA file. The grant sits on FHA first mortgages at 96.5% loan-to-value, on one-to-four-unit homes.
The catch is a small one. The grant is not offered in Washington. It cannot be combined with several other FHA programs or with any other assistance. It is also a smaller slice of the price than some of the second-lien options, at either 2% or 3.5%.
Be careful with the word itself. Programs labeled “grants” are sometimes forgivable loans in disguise. The test is simple: ask whether you will sign a note and whether a lien will be recorded. If yes, it is not the no-strings grant described here.
A grant also doesn’t hand you a free pass on occupancy. These are primary-residence programs. Buy with the intention of renting the home out and you are in the wrong lane entirely. Read the grant agreement for any occupancy condition before closing.
When a Forgivable Second Is the Better Fit
The forgivable second fits when the grant is closed to you, or when your first mortgage has to be something other than FHA. It also fits when you plan to stay at least three years.
Reasons buyers choose it:
- No income test. There is no income limit in the option itself. A USDA first mortgage carries USDA’s own limits.
- More first-mortgage choices. It pairs with FHA, USDA and HUD-184 first liens, for one-to-two-unit homes.
- A larger slice. It is 3.5% of the lesser of price or appraised value. That helps most with the FHA minimum investment, which is also 3.5%.
- No monthly payment. You make no payments on the second, so it adds nothing to your monthly obligations while it sits there.
- No counseling requirement. That removes a step.
The tradeoffs are real. The credit floor is higher at 640, or 660 on a blended score. The second is a loan, and it stays a loan until the schedule runs out. Choose the 36-month term and you are committing to roughly three years of on-time payments on the first mortgage. Choose 60 and it is five. A payment of 90 days or more late can put the forgiveness in jeopardy.
Think of it as a bet on staying put. If you win the bet, the lien disappears. If life changes early, you pay for the change.
(The other option in this family is a repayable second, with a payment and a balloon in year 10. It is a different tool, built for buyers who need closing-cost help more than a forgiveness schedule.)
What Happens at a Sale
At sale, a grant has no payoff line. A forgivable second has a payoff line only until the schedule completes. After that, the lien is released and the sale looks like any other.
Run the picture in percentages. Say you buy at a given price and take the forgivable second at 3.5% of the lesser of price or value. Then you sell, or move out, in month 20 of a 36-month term. The second lien is still recorded against the home. The title company asks the second’s holder for a payoff letter. The amount shown is set by the note, not by a formula in the program summary. It is paid out of your sale proceeds at the closing table, ahead of your cash.
Agencies do not set one national formula for how a partly forgiven balance is calculated. Providers write their own notes. Some prorate. Some require the full original amount until the schedule ends. Read your note for the answer. That reading is the most useful hour you will spend on this topic.
Now the thin-proceeds case. Say prices dipped or you bought with a minimal down payment. After the first mortgage, selling costs and the second lien, there may be little left. The payoff on the second still has to be satisfied to deliver clear title to the buyer. A forgivable second can therefore turn a break-even sale into a tight one. A grant cannot, because there is nothing to pay back.
One more point, and it comes up with unwelcome timing: forgiveness is not the only way the second can come due. The note usually lists its own triggers. Common ones are a sale, a refinance, paying off the first mortgage, a transfer of the home, or ceasing to live in the home as your primary residence. Once the schedule is complete, none of those matter for the second, because there is nothing left to trigger.
What Happens at a Refinance
At a refinance, the forgivable second has to be paid off or the second lender has to agree to stay behind the new first mortgage. A grant has no lien, so it is not part of the conversation.
Subordination is the key word. Fannie Mae’s Selling Guide, for example, says a subordinate lien left in place on a refinance must be resubordinated to the new loan. The same logic runs through FHA and USDA practice. Subordination is granted at the second lender’s discretion. Some providers restrict or refuse it. Some allow it once, or only for certain refinance types.
Rules differ by first-mortgage program. On a USDA first mortgage, a down payment assistance second cannot be rolled into a new guaranteed refinance. It has to be subordinated or paid in full. On an FHA refinance, a second left in place counts toward combined loan-to-value, so it can limit how much you can borrow.
Two practical points follow.
First, the forgiveness window limits your refinance flexibility. If you might refinance within three or five years, the window matters. A grant never gets in the way.
Second, one refinance product is off the table. The refinance-cost second lien in this network cannot be used to refinance an existing assistance loan. You cannot use one assistance loan to retire another.
If you are weighing a cash-out refinance later, the second’s lien also eats into usable equity. Lendmire’s piece How Much Equity a Cash-Out Refinance Leaves Usable vs a Sale walks through that tradeoff.
A forgiven second is a different matter from a forgiven mortgage payment. Tax treatment can depend on your situation, so buyers should speak with a qualified tax professional before relying on any deduction or credit.
What Breaks Forgiveness Besides Selling
Selling is the obvious trigger. These are the ones buyers miss:
- Falling 90 days or more behind on the first mortgage during the window.
- Moving out and treating the home as a rental. The assistance exists for a primary residence.
- Paying off the first mortgage early, which may happen as part of a refinance.
- Transferring the home, including a deed to another person.
Run through your own plans against that list. A job relocation in year two is a very different risk from a refinance in year two. The first usually means a sale. The second might be solved by a subordination request.
Before You Sign: Questions That Matter
Ask the loan officer these, and get answers in writing where you can:
1. Is this a grant with no lien, or a loan with a forgiveness schedule?
2. Does the note prorate the balance, or does the full amount stay due until the schedule completes?
3. What events trigger repayment?
4. Will the second lender subordinate to a refinance, and under what limits?
5. Does the option fit the first mortgage I need, and my income and score?
6. Is a homebuyer education course required, and when is it credited back?
For lien-based assistance, your lender will collect the second’s note and its recorded security instrument. That is routine, and it is the paper that carries the recapture terms. Read it before you sign, not after.
The Balanced Verdict
Neither option is simply better. They solve different problems.
Pick the grant when you qualify and want the cleanest exit. It leaves nothing behind at sale or refinance. Its price is eligibility: an income test or qualifying category, an education course, FHA only, and a smaller slice of the price.
Pick the forgivable second when you need the flexibility. It has no income test, it pairs with more first-mortgage programs, and it is larger. Its price is time. Until the 36- or 60-payment mark, it is a lien that can complicate a sale or a refinance.
If you expect to stay put for years, the forgivable second’s drawbacks mostly fade. If your plans are uncertain, the grant’s clean exit is worth more than the percentage it forgoes. Realistic buyers often land in the middle: they qualify for one, compare the other, and choose based on how long they honestly plan to stay.
If you are buying a primary home and want to see whether a down payment assistance option fits your file, Lendmire can help you compare the grant, forgivable and repayable structures alongside an FHA, USDA or HUD-184 first mortgage. Program details change, and every file is underwritten individually through wholesale lenders, subject to program guidelines. This is not a commitment to lend.
Frequently Asked Questions
Does a grant ever have to be paid back at sale or refinance?
In the grant option Lendmire arranges, no. It carries nothing to repay, creates no lien and is released at closing. Other programs sometimes use the word “grant” for something that is really a forgivable loan, so check whether you are asked to sign a note. If you are, treat it as a second lien.
Can I refinance while a forgivable second is still in place?
Yes, but the second has to be paid off or subordinated to the new first mortgage. Subordination is up to the second’s holder. On a USDA loan, the second cannot be rolled into the new guaranteed loan. If you might refinance within three or five years, ask about subordination before you accept the assistance.
What if I sell before the 36 or 60 payments are made?
The second is still a recorded lien, so the payoff comes out of your sale proceeds at the closing table. The amount depends on the note’s schedule. Ask the title company for a payoff letter early so the figure is not a surprise.
Do I have to be a first-time buyer?
No. None of these options requires you to be a first-time buyer, so repeat and move-up buyers can qualify for each of them. The grant’s income test is 140% of area median unless a category applies. Assistance applies to an owner-occupied primary residence only.
Does the forgivable second raise my monthly payment?
No. It carries no interest and no monthly payment, so it does not add to your monthly obligations while it is in place. A repayable second does add a payment and a balloon. Treat these as different products.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, USDA and HUD-184 purchase loans with down payment assistance options through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B2-1.2-04: Subordinate Financing
2. IRS Topic No. 431: Canceled Debt
This article is part of Lendmire’s First Time Home Buyer series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: DTI Rules for Grants, Forgivable Seconds and Repayable DPA Loans · How Gifts and Down Payment Assistance Cover a Full Down Payment · How Grant and Second-Mortgage DPA Programs Price the Assistance
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.