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Silent Second Mortgage
A silent second mortgage is when you take out a loan (in addition to a mortgage) to pay for a down payment.
While a silent second mortgage may appear to be a good deal, there is a proper and improper way to go about it.
The risks, problems, and how to lawfully take out a second mortgage on a house if you need money for the down payment are all discussed below.
What Is a Silent Second Mortgage?
A mortgage is a loan used to buy a home or other piece of property. When a person takes out a first mortgage to buy a home, they not only get the money, but they also get the house as collateral.
A second mortgage is a loan secured by a second piece of property. If a second mortgage or loan is used to secure down payment funds and then not disclosed to the original mortgage lender prior to closing, it is dubbed “silent.”
Failure to declare a second loan to a lender is prohibited, and borrowers who do not do so may face legal action.
How Do Silent Second Mortgages Work?
So, how do silent second mortgages operate if they’re illegal? Second mortgages are entirely legal and frequent, but when borrowers try to conceal loans taken out on a property, the legal lines are crossed.
Even if you don’t believe this is a huge concern, keep in mind that lenders require borrowers to verify where any down payment funds originated from, thus failing to disclose a second mortgage (or outright lying about where the money came from) is unlawful.
The reason for the existence of silent second mortgages is that borrowers frequently require funds to make a down payment on a home.
Davis, for example, wants to buy a $200,000 property but lacks the $40,000 required for a 20% down payment.
He doesn’t want to lose the house, so he takes out a private investor loan that won’t show up on his credit report.
Because the bank has no idea, he didn’t use his own money for the down payment, this loan between Davis and the private investor is a silent second mortgage, which is illegal because it wasn’t declared.
Why Do Lenders Fear Silent Second Mortgages?
The collateral for a costly home purchase is the object being purchased (the house).
If another loan is secured by the property, the first lender will face difficulties, especially if they need to seize the property in the event of foreclosure.
If there are other existing liens on the property, they won’t be able to acquire clear control of it during the foreclosure process.
Even if buying a house with no money down sounds like a fantastic chance, a hidden second mortgage is bad news for homeowners as well.
A buyer who takes out a second mortgage is always taking on extra debt, sometimes at a greater interest rate than low mortgage rates, plus they wind up paying more in interest over time and have two separate monthly payments.
Not to mention that a buyer who puts no money down will have to wait longer to build meaningful equity in the home.
How to Avoid a Silent Second Loan with A Down Payment Assistance Program?
Borrowers in need of a down payment have some good news (and this option is perfectly legal).
Borrowers who apply for a down payment assistance (DPA) program can avoid silent second mortgages.
Several down payment aid programs are currently available from both municipal and state governments, as well as the federal government.
These schemes do generate a second mortgage on the home if approved, but the lender is aware of them and frequently works with them to encourage buyers to become homeowners.
You can avoid the need for a silent second mortgage loan by combining a first-time home buyer program with down payment help.
Let’s imagine you buy a house using the Fannie Mae HomePath lending program.
Because a down payment of only 3% is required, you could apply for a municipal or state grant to cover the remaining balance.
If you use an FHA loan, your lender can assist you in finding an assistance program that fits your needs.
How Do Loans for Down Payment Assistance Work?
Potential borrowers must meet certain program criteria, which are frequently based on income, occupation, and credit score, in order to get down payment aid, while the eligibility requirements and amount of assistance granted vary by state and program.
However, here’s how down payment assistance loans operate in general:
1. The borrower is given a lump sum or a percentage of the purchase price as financial help.
2. The program creates a “soft” second mortgage on the property in exchange for money at closing.
The phrase “soft” refers to loan arrangements that are extremely beneficial to borrowers, such as below-market interest rates, flexible loan terms, and even full forgiveness in some cases.
Sadie, for example, applies for and is accepted into an Atlanta down payment help program.
In exchange for a soft second mortgage on her property, she receives $15,000 to aid with her down payment and closing costs.
Her second loan stipulates that $3,000 is forgiven each year. If she stays in her home for five years, the debt is forgiven in full, but if she sells before that time, she will be responsible for the remaining balance on the second mortgage.
The initiative aims to stabilize areas that were heavily damaged by the 2008 foreclosure crisis by allowing residents to acquire unoccupied homes and stay in them for the long haul.
It’s fantastic if you get a down payment assistance grant rather than a loan. Free cash!
These grants are sometimes referred to as “soft” or “silent” second mortgages, although lenders are aware of them, thus they are not unlawful.
Down payment assistance programs offer loans that are forgiven over time and have no interest, but you won’t know what you qualify for (or even what’s available) unless you do some research or call your local Department of Housing and Urban Development (HUD) office.
In Conclusion
Mortgage fraud occurs when you lie about your down payment funds. Mortgage fraud with a secret second mortgage can result in home foreclosure at best and jail time at worst.
Instead, if you’re having trouble saving for a down payment, look into “soft” second mortgages available through down payment assistance programs run by local government agencies and HUD.
While the amount of help provided varies by program, purchasers should not let the lack of a down payment prevent them from becoming homeowners.