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. Mortgage Banker

    A company, individual or institution that originates mortgages. ...
  4. Loan-To-Value Ratio - LTV Ratio

    A lending risk assessment ratio that financial institutions and ...
  5. Down Payment

    A type of payment made in cash during the onset of the purchase ...
  6. Equity

    1. A stock or any other security representing an ownership interest. ...
RELATED FAQS
  1. What do mortgage lenders use the securitization food chain?

    The phrase "securitization food chain" was made popular by director Chris Ferguson in "Inside Job," a film about the 2007-2 ... Read Full Answer >>
  2. Do mortgage escrow accounts earn interest?

    A bank is not required to pay interest on any escrow accounts (also mortgage impound accounts) it holds for its customers. ... Read Full Answer >>
  3. What role did securitization play in the U.S. subprime mortgage crisis?

    The securitization of subprime mortgages into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) ... Read Full Answer >>
  4. How often is interest compounded?

    Interest can be compounded on any given frequency schedule. Common interest compounding time frames are daily, monthly, semi-annually ... Read Full Answer >>
  5. How does the loan-to-value ratio affect my mortgage payments?

    Several factors affect the mortgage rate you can obtain when you purchase a home. Lenders analyze credit histories and scores ... Read Full Answer >>
  6. What's the difference between a collateralized debt obligation (CDO) and a collateralized ...

    A collateralized mortgage obligation, or CMO, is a type of mortgage-backed security (MBS) issued by an lender that handles ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    4 Steps To Attaining A Mortgage

    It starts with knowing your choices as well as your price range. We show you how to get there.
  2. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  3. Budgeting

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.
  4. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  5. Credit & Loans

    Is it Worth Saving Up for a Bigger Down Payment?

    There are numerous low-down-payment mortgage options out there, but sometimes it makes sense to build up your savings so you can borrow less.
  6. Credit & Loans

    Is A 30-Year Mortgage Really Best?

    It's the most popular choice, but home buyers with 30-year mortgages may be paying more to finance their home than they need to.
  7. Credit & Loans

    What Are The Pros and Cons Of A 15-Year Mortgage?

    The shorter term, and higher monthly payment, are only part of the picture.
  8. Credit & Loans

    Which Is Better: A 30-Year Or 15-Year Mortgage?

    The difference in monthly payments is what homebuyers think of first when they compare the two. But have you considered these other points?
  9. Credit & Loans

    Is It Worth Buying A Second Home To Rent?

    Mortgage interest rates are low, but consider these dos and don'ts before making the leap into rental property ownership.
  10. Credit & Loans

    How To Combine Two Mortgages Into One?

    If you have a second mortgage as well as a primary, does it make sense to consolidate into a single loan? Here's how to figure it out.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center