A first mortgage is what you might traditionally think of when buying a house, but there’s another relevant concept—a silent second mortgage. A silent second mortgage can have some major pitfalls to be aware of.
What Are Silent Second Mortgages?
To discuss silent second mortgages, it’s good to think about how a conventional mortgage will work. If you’re a buyer, you save a down payment and then apply for a loan with a mortgage lender. The lender checks your credit score and asks plenty of other questions, like where you got the money for your down payment.
The mortgage lender asks these questions to determine how much debt you will repay every month and how much of your monthly income goes to debt. The lower the debt, the better odds the borrower sees that you’ll be able to make your payments for your mortgage. The lender is doing the legwork to protect themselves.
Then, a silent second mortgage can become part of the situation.
If you want to buy a house but don’t have enough saved to make a down payment, you might go to a financial institution. You could borrow the down payment, and then there’s a loan record. When checking your credit, the mortgage lender will see a personal loan. If your income isn’t high enough to repay the loan easily, as well as the mortgage and any other financial applications, your mortgage application might get turned down.
Instead of having that happen, you could find someone else to lend the money for the down payment, believing you can keep it hidden from a lender.
Maybe you have a friend offering to loan you down payment money, for example, but at a high interest rate. If you can keep up with the payments, it’s a good situation for the person who lent you the money. If you can’t keep up with the payments, the person who gave you money might be able to take the property as theirs.
Someone who offers a loan to help another person skirt the law is known as a straw buyer.
Is It Illegal?
A silent second mortgage is fraudulent and illegal. You can face prosecution if you’re caught taking this type of loan. You could put yourself in a seriously risky situation as well as the mortgage lender.
The lender didn’t know the loan existed, affecting how they assess your debt-to-income (DTI) ratio.
It’s Not a Regular Second Mortgage
It’s important not to get confused between a silent second mortgage and a regular second mortgage. For example, if you use your home’s equity to take out a home equity line of credit, this is a second mortgage.
You have to repay the line of credit and keep up with your original mortgage payments, but the lender knows how much you owe from the beginning. There’s nothing hidden in terms of something that could limit your ability to repay your financial obligations.
A second mortgage is common and legal. A silent second mortgage is neither.
Rather than going around a lender, looking at different paths that will allow you to buy with a lower down payment, like a USDA or VA loan or a down payment assistance program, is much better.
Finally, even if you’re getting a loan from a family member, it’s still illegal to get a loan to buy a home without a lender’s knowledge.
