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Silent Second Mortgages Can Be Used for Commercial & Residential Purposes Staff - Mortgage Lenders Plus.com

There are two very different definitions for the term “silent second mortgage;” one that involves helping get people into affordable housing and one that involves fraudulent activity.

In the affordable housing arena, a silent second mortgage is typically a second mortgage offered at preferential (subsidized) terms to those who qualify. These are generally offered by the state through one of three federally authorized programs, all of which originate with either the FHA or HUD. The Federal programs typically entail a 97% FHA loan and a 3% silent second mortgage that is offered at below-market rates or forgiven entirely after a certain period of time.

Counties and municipalities also offer mortgage assistance programs to first-time home buyers that buy in their communities which assist in providing down payment to complete the purchase of the home. These generally come in the form of a silent second mortgage placed on the property at the time of closing. Designed to fill the gap between what a first time homebuyer can borrow from a mortgage lender and the purchase price of the home, a local first time homebuyer program may provide a silent second mortgage to be utilized to satisfy down payment requirements of the first mortgage lender as well as pay the borrower's closing costs and other fees associated with the home purchase.

Some communities provide qualifying first time home buyers funding sources through the silent second mortgage that may be layered together in a series of secondary loans. These are forgiven after a certain period of time as long as the owner doesn’t sell nor do a cash-out mortgage refinance.

A silent second mortgage for investment properties is different than it is for residential properties. It generally entails second or junior mortgage loan on the property that does not require a scheduled payment until the rental income levels have reached a pre-determined point.

Silent second mortgages are even sometimes used as a workaround for when home owners are behind on their mortgages. Rather than foreclose, the lender might modify the loan by reducing the rate, or offer a "silent second," in which payments on the past-due amount are deferred until the house is sold.

The riskiest form of a silent second mortgage is an unrecorded private money loan from the seller to the buyer during a purchase transaction. It’s illegal for a seller to provide down payment money, so these loans will often go unrecorded. An example of this is an 80/10/10 plan where the borrower puts down 10%, the seller lends the borrower 10% (unbeknownst to the bank) and the first mortgage is 80%. If the borrower defaults, the seller has no recourse.