Question:

What is a silent second mortgage loan?

Answer:

A silent second mortgage loan often constitutes a fraud. It is a second mortgage your primary lender is not aware of. The silent second mortgage is a loan taken by the borrower to provide a down payment of 20%.

The primary lender funding 80% of the house value rests assured that in case of depreciation there will be equity of 20%, when in fact the borrower may have contributed only 5% and taken a silent second mortgage loan of 15% to make the down payment. In that case, a 5% depreciation would cancel all the equity the borrower has, while the original lender believes his loan is protected to 20% decrease in home values.

In some cases, the silent second is held by the seller. It is risky to the seller as if the buyer defaults on payments on the silent seller held second mortgage loan, the seller can't foreclose.

The silent second mortgage loan is not always a fraud.

It is also used as a mortgage on subsidized terms and may be completely waived after specified occupancy term expires. A good example is the HUD-sponsored Good Neighbor Next Door (GNND) program with which the silent second mortgage is completely waived if the qualified borrower occupies the GNND home for at least three years.

Yet another way to use silent second mortgage loans are as mortgages that:

  1. require full repayment after a house is sold; or
  2. payments have to begin only after an investment property reaches specified income level.

 

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