Silent Second Mortgage
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. |
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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) |
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