What Is a Silent Mortgage?

A silent mortgage generally refers to a second loan taken out to cover part of the cost of the mortgage but not disclosed to the main mortgage lender.

Function

A silent second mortgage helps you borrow enough to pay for the down payment on a home. For example, if you needed to borrow $290,000 but your mortgage lender would only give you $260,000, you might try to find a second silent mortgage for the remaining $30,000.

Effects

Having a silent second mortgage reduces the amount of equity you have in your home. If a mortgage lender thinks you put down a 20 percent down payment when in fact you put down 5 percent and borrowed 15 percent, the lender does not have as much cushion against a drop in home prices.

Warning

In many cases, a silent second mortgage is illegal because you do not disclose the debt when you are applying for your mortgage.

Risks

According to Mortgage QnA, a silent second mortgage is often seller-financed. However, this practice is very risky for the seller because the seller cannot recover losses if the bank forecloses.

Special Programs

Certain programs, like HUD's Good Neighbor Next Door program, incorporate a silent second mortgage that is not activated unless the terms of the program are broken. Once you have completed the program, the silent second mortgage can be waived.

References

• Investopedia: Silent Second Mortgage
• Mortgage QnA: What is a Silent Second Mortgage?

Resources

• HUD: About Good Neighbor Next Door