Scraping together money for down payment is one of the most common challenges American homebuyers have today. It can be hard to come up with a down payment for a home when, ideally, it has to be around 20 percent of the property’s purchase price.
Typically, a 20 percent down payment is necessary to have an attractive mortgage offer. It can significantly reduce the mortgage interest because lenders believe that this amount is sufficient enough to make up for the risk involved in lending money.
The down payment isn’t the sole determinant of whether the mortgage will be affordable or not, but it has a great bearing.
In the attempt to meet the down payment requirement, individuals devise various strategies.
Some do it the old-fashioned way, saving up for it. And while this may be considered “old-fashion” it still remains effective and the safest way to come up with down payment money. The only downside is that it may take months or even years to come up with an enough down payment through saving.
Another option to solve the down payment dilemma is to qualify for a low or zero down payment. This greatly reduces (or gets rid) of the down payment. This means that the homebuyer can focus on other costs instead. low to no down payment mortgages are really good home financing programs, but that’s a story for another day.
One option some borrowers consider is a silent second mortgage. This means that a separate loan is taken to cover the home’s down payment requirement.
This sounds like a good option, but is it safe? Why is it called silent second mortgage? Is it legal?
Understanding Silent Second Mortgages — Same Name, Two Very Different Loans
We’ve already established earlier that it is another loan. The money you will get from it can be used to complete the 20 percent down payment you need to buy a house.
What we should focus on is the word “silent”. There are two very different reasons why each is silent. These reasons delineate which one is legal and which is a fraud.
When Silent means Illegal
“Silent second mortgage” sometimes pertains to a secondary loan which is not disclosed to the lender of the original mortgage.
The lender is made unaware that the money used for the down payment came from a separate mortgage. This is usually done for the reason that the homebuyer can’t afford the down payment.
Just as a primary mortgage, the house becomes a collateral for this secondary mortgage.
In these circumstances, this silent second mortgage is considered a fraud.
This “side loan” taken from a different lender is purposely kept a secret from the primary lender because this isn’t allowed. Homebuyers who will get caught with this kind of silent second mortgage can be in serious trouble.
The said borrower can be convicted of mortgage fraud and will spend a significant time in jail and will have to pay monetary fines.
When Silent Means Aid
Now, the legitimate (and very legal) kind of “silent second mortgage” is in a form of down payment assistance.
Now, it being “silent” has far a different meaning that the first kind of silent second mortgage.
Legal silent second mortgages are designed to help deserving homebuyers afford a home. Moreover, the primary lender is made aware of this down payment assistance.
It is silent because this secondary mortgage only becomes due once the primary mortgage is completely repaid. This means that the borrower can focus their effort and resources in paying off the original loan first while the secondary loan remains silent.
In addition, some silent second mortgages are forgivable loans. This means that the entire (or a portion of) the second mortgage is forgiven after a specified period of time if the borrower meets certain conditions.
To put simply, this is the kind of silent second mortgage you would want to take advantage of.
Using a silent second mortgage can be tricky. You have to make sure that what you are getting the right kind of secondary loan.
The best way to do this to only do business with legitimate down payment assistance providers or silent secondary mortgage lenders. Your primary lender can give referrals to the possible providers and lenders. You can connect with reputable lenders by clicking on the link.