Silent Second

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Silent Second

Description: A silent second is a second mortgage placed on a home so that a purchaser can buy the home even without a sufficient down payment. The reason they are called silent is that the first lender doesn't know about the second mortgage, and most likely wouldn't have approved the first mortgage if they had known. It is usually done when the buyer doesn't have enough money for a down payment.

The term can also be used for shared equity mortgage programs offered by various housing assistance programs. In this case, a loan is ade to the home purchaser, with repayment due only when the home is sold or refinanced.

Silent second mortages can often constitute fraud. One example would be when the first lender agrees to loan 80% of the home's value, believing the buyer will be putting a 20% down payment. If the buyer then borrows most or all of this 20% from the seller in secret, the lender is at greater risk because they relied on the buyer having some "skin in the game".

An even more fraudulent example is when the buyer and seller conspire to inflate the price of the property to take out a larger first mortgage than the the lender otherwise would. For example, the lender may only be willing to loan 80% of the value, but the buyer and seller agree to a sale at a higher price with the seller loaning a second. After the sale, though, the seller forgives the second mortgage, leaving the first lender with a loan on potentially 100% of the value of the property.

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