What is a Silent Second Mortgage? How Does it Work?
The term “Silent Second” is used relatively loosely in real estate and mortgage circles, and therefore no official or standard definition exists. However, most descriptions and uses of the term have one thing in common, and that is a Silent Second Mortgage is one that is invisible to the primary lending institution.
Why is this significant?
There are many benefits to a home buyer obtaining additional financing without the main lender being aware. In many cases, the Silent Second Mortgage is obtained because the borrower would otherwise not be able to qualify for the bulk of funds required to purchase a home. If the lender was aware of the additional loan, it is possible that the borrower would not meet their criteria for approval.
Examples
Perhaps the most common use of the term Silent Second Mortgage is to describe a situation where the buyer does not have adequate funds for a down payment, nor adequate credit to obtain 100% financing from a lender, therefore the property’s seller will loan the buyer the money necessary for a down payment. In this case, the buyer would use the seller’s loan as down payment, and the mortgage lender would provide the remainder of the money. The buyer then repays the mortgage company as usual, and also repays the seller his down payment based on terms they previously agreed to. This is extremely dangerous for the seller because there is no collateral securing his loan, therefore he would have extreme difficulty getting his money back if the buyer defaulted on their agreement.
Another use of the term describes a type of assistance occasionally offered to first-time-home-buyers in specific states of counties where additional funding is provided for a down payment on a home. For those buyers who qualify financially, these municipal organizations may be in a position to give them enough cash for a down payment on a home, but usually with certain restrictions. Such restrictions typically involve the location of the property, the length of time the buyer will remain a resident, and what the buyer is permitted to do with the main mortgage contract. In this way, these government organizations are acting independently of the mortgage lender to enhance their communities.
Lastly, it is not entirely uncommon for mortgage companies to create Silent Second Mortgages for those borrowers who fall significantly behind on payments. In this scenario, the lender will “pay” the outstanding monthly payments to bring the borrower current on the first mortgage, and create a second (silent) loan for the total spent. Again, this is an unsecured loan, so the lender is taking a chance on the borrower by agreeing to such terms.
