For Oklahoma buyers

OHFA's 3.5% second mortgage: when you pay it back

OHFA's down payment help is a 0% second mortgage, not a grant. When it comes due, what happens when you refinance or sell, how it compares with forgivable Oklahoma programs, and the federal recapture tax.

The short version:

OHFA's assistance is 3.5% of your first mortgage, loaned at 0% with no monthly payment. It's repaid in full when you sell, refinance, transfer the home, stop living there, or the first mortgage reaches its end. It isn't forgiven. Separately, because Gold loans come from tax-exempt bonds, a federal recapture tax can apply if you sell within nine years, but only if you have a gain and your income has risen past a set limit. It's capped at half your gain.

Call it what it is: a loan you'll repay later

People hear "down payment assistance" and think "free money." OHFA's 3.5% is a good deal, but it isn't free. It's a second mortgage at 0% interest, with no monthly payment and no fees added. You owe exactly what you borrowed, no more and no less, and it comes due later.

On a $300,000 first mortgage, the assistance is $10,500. Ten years later you still owe $10,500. The good news is it never grows. The thing to plan for is when you'll need to pay it.

What makes it come due

OHFA's Gold program guides list five triggers:

You sell the home.
You refinance the first mortgage.
You transfer the title to someone else.
You stop living there as your main home.
The first mortgage reaches maturity, usually after 30 years.

Most people pay it from sale proceeds when they move up. The one that sneaks up on folks is refinancing. If rates drop in a few years and you want a new loan, the $10,500 has to be paid off as part of that refinance. That takes equity or cash. Keep it in mind before you get excited about a refi ad.

How it compares with other Oklahoma help

Program	Type	When you're done with it
OHFA Gold or Dream 3.5%	Repayable 0% second	Repaid on sale, refinance, transfer, move-out or maturity
REI Home100 (FHA, VA, USDA, 184)	Gift	No repayment
REI Home100 Conventional	Forgivable 0% second	Forgiven 1/84 each month over 7 years
Tulsa County First Home	Forgivable 0% second	Forgiven after 5 years
Oklahoma City DPA	Forgivable deferred note	10-year affordability period, prorated 1/120 a month
OHFA Housing Stability Enhanced DPA	Extra 5%, forgivable	Forgiven 1/36 a month over 3 years; only on homes built with certain OHFA-administered state funds

So why pick OHFA? For 4 Schools and Shield buyers, OHFA carries the 0.125% lower rate. Over a 30-year loan, a lower rate can be worth more than the difference between a repayable and forgivable second. Your lender can price both ways.

Where the money goes at closing

OHFA applies the 3.5% in a set order: your minimum down payment, then normal closing costs, then any leftover to pay down the first mortgage. You don't get cash back, except reimbursement of earnest money, the credit report and the appraisal fee. See what you'll pay at closing for a worked example.

Rules that keep you in one OHFA loan

You can only have one OHFA loan at a time.
On OHFA's government loans, another second lien needs OHFA's approval. On its Freddie Mac conventional loans, another second lien isn't allowed.
You must move in within 60 days of closing and live there as your main home. No rentals or second homes.

That second point matters if you're hoping to add a city, county or tribal grant. Ask early.

The recapture tax, without the jargon

OHFA's Gold loans are funded with tax-exempt mortgage revenue bonds. Under federal tax law, a buyer who got a below-market bond loan may owe a recapture tax if they sell within the first nine years. Most people end up owing nothing, because all three of these have to be true per the IRS instructions for Form 8828:

You sell or dispose of the home within nine years. Refinancing without selling doesn't count.
You make a gain on the sale. Sell at a loss, and there's no tax.
Your income in the year of sale is above the limit listed in the notice your lender gives you at closing. At or below it, no tax.

If all three line up, the tax starts at 6.25% of the highest subsidized loan amount, then gets scaled by how long you owned the home and how far your income was over the limit. It can never be more than half of your gain. It's reported on Form 8828 with your federal return for the year you sell. A transfer to a spouse in a divorce doesn't trigger it, but giving the home away counts as a sale at market value.

Keep this one piece of paper

At closing your lender should give you OHFA's recapture disclosure with the income limits for each year. File it with your deed. If you sell in year five, you'll want it.

Example: selling in year six

Here's an illustrative case. A Stillwater officer buys with a $240,000 first mortgage, so OHFA's assistance is $8,400. Six years later he takes a job in another city and sells. At closing on the sale, the title company pays off the first mortgage balance and the $8,400 second, then hands him what's left.

Recapture? He made a gain, so he checks the income limit for year six in his OHFA notice. If his household income that year is at or under it, he owes nothing. If it's over, he figures the tax on Form 8828, and it can't be more than half of his gain. Either way, the second mortgage is still exactly $8,400, because it never accrued interest.

Planning around the payoff

If you might move in a few years, for a new district, a promotion or a transfer, sale proceeds usually cover the 3.5%. Just count it in your math.
If you plan to refinance when rates fall, the 3.5% comes due then. Build equity or savings for it.
If you owned a home in the last three years, you're not a first-time buyer for Gold. OHFA Dream offers the same 3.5% second for repeat buyers, without the special rate.

If a repayable second still fits your plans, check your eligibility for OHFA 4 Schools or Shield and ask a lender to show you the numbers next to a forgivable option.

Questions people ask

Is OHFA down payment assistance a grant?

No. It's a second mortgage at 0% interest with no monthly payment. You repay the full amount when you sell, refinance, transfer the home, stop living in it, or the first mortgage matures.

Do I have to repay OHFA assistance if I refinance?

Yes. Refinancing the first mortgage is one of the triggers, so the 3.5% is paid off as part of the new loan.

Will I owe recapture tax if I sell my OHFA home?

Probably not. It only applies if you sell within nine years, make a gain, and your income that year is above the limit in your closing notice. Even then it's capped at half your gain.

Can I add another down payment program to an OHFA loan?

Sometimes. OHFA's government loans allow another second lien only with OHFA's approval, and its Freddie Mac conventional loans don't allow one. Ask your lender before you apply for both.

Free printable: the Oklahoma homebuyer checklist. Papers, steps, programs and the questions to ask, all on one sheet. Download it