What Is a ‘Silent Second?’

Written by Posted On Thursday, 11 May 2023 00:00

There’s a term in the mortgage industry called a ‘silent second.’ Actually, it’s more than just a term but a real thing. And mortgage lenders don’t like them. In fact, they really don’t like them to the point that if a home buyer discloses the existence of a silent second, the deal won’t close. At least as it was initially designed. 

First, a silent second is typically used only with a conventional mortgage. This is in contrast with non-conventional, or government-backed loans. Why? Government backed loans such as VA, FHA and USDA programs either don’t have a down payment requirement or if there is a down payment needed it’s a very small one. 

A conventional loan might or might not require what is referred to as private mortgage insurance, or PMI. With a down payment of less than 20% of the value of the home, lenders will want a separate insurance policy in the approximate amount of the actual down payment and the 20% threshold.

To avoid this additional insurance policy, borrowers can also apply for a second mortgage to make up the difference between the down payment and 20% of the sales price. Mortgage lenders can issue a first mortgage as well as a second one. Both are recorded and attached as an official lien against the property.

With a silent second however, the secondary amount is not disclosed to the original lender. The silent second lender is usually the seller. But withholding this information means the lender is making a financing decision with less than all the information.  A silent second also means the lien isn’t recorded and only known by the borrower and the source of the silent second.

A silent second might be used as a source for down payment money, closing costs or both. Because lenders want to know the source of down payment and closing cost money, oftentimes the second is transferred to the borrower well ahead of the final transaction, which then means the funds have been in the borrower's account long enough that the lender naturally assumes the funds do in fact belong to the borrower.

But what happens when the first mortgage company catches wind of the silent second? What if the buyer stops making payments toward the silent second note holder? In this instance, foreclosure proceedings or demand letters will be issued. This will of course alert the lender to the existence of additional financing and, because the borrowers went outside the terms of the original mortgage agreement, the first mortgage lender will then follow suit and call in the note. Not a pretty sight.

Instead , buyers simply need to slow down a bit and begin saving funds for a closing or search out legitimate sources of down payment and closing cost funds. This is something your mortgage loan officer can help with.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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