Silent Second Mortgage

AAA

DEFINITION of 'Silent Second Mortgage'

A secondary mortgage placed on an asset that is not disclosed to the lender of the original loan. Silent second mortgages are used when a purchaser can't afford the down payment required by the initial mortgage. The mortgage is silent because the original lender is unaware of its presence. In many circumstances, a silent second mortgage is a type of fraud.

INVESTOPEDIA EXPLAINS 'Silent Second Mortgage'

When the original mortgage lender provides funds, the arrangement requires the borrower to provide a down payment. The fraud occurs when a second mortgage is used to fulfill the obligation of the down payment.

For example, let's say that you wish to purchase a house for $250,000. You have secured a mortgage for $200,000, which requires a down payment of $50,000. However, you can't acquire the necessary funds for the down payment, so you decide to take a silent second mortgage of $40,000. The original lender believes your down payment to be $50,000 when it is actually only $10,000 ($50,000 - $40,000). This increases the original lender's risk because a 4% decrease in the home's value ($10,000 / $250,000) will wipe out your equity, but the original lender believes you are covered up to a 20% decline in prices ($50,000 / $250,000)

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Tri-Party Agreement

    A business agreement between three separate parties. In the mortgage ...
  3. Equity

    1. A stock or any other security representing an ownership interest. ...
  4. Loan-To-Value Ratio - LTV Ratio

    A lending risk assessment ratio that financial institutions and ...
  5. Mortgage Banker

    A company, individual or institution that originates mortgages. ...
  6. Down Payment

    A type of payment made in cash during the onset of the purchase ...
Related Articles
  1. 4 Steps To Attaining A Mortgage
    Credit & Loans

    4 Steps To Attaining A Mortgage

  2. Understanding Your Mortgage
    Personal Finance

    Understanding Your Mortgage

  3. Mortgages: How Much Can You Afford?
    Budgeting

    Mortgages: How Much Can You Afford?

  4. Make A Risk-Based Mortgage Decision
    Options & Futures

    Make A Risk-Based Mortgage Decision

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center