There are instances when home loans can be a pain. And, they can get expensive if you are on a tight budget.

Fortunately, there are some ways around this. Today we will discuss the silent second mortgage option. But you have to be careful here because there are situations where they are illegal.

Getting one can get you a loan for that new home you want. Or it can get you sent to jail. So you have to be careful here!

Below we’ll give you an overview of what is a silent second mortgage, how they can be helpful, when they are legal and when they are illegal.

We’ll also cover what may happen if you get one illegally.  

What Is A Silent Second Mortgage?

A second mortgage is an additional mortgage on your home. It’s also known as a home equity loan. But it’s different from a silent second mortgage.

A silent second home loan is a second mortgage that’s put on your home to help you come up with the down payment for your home’s primary mortgage.  

A second mortgage is considered “silent” if it provides coverage for the down payments of the primary mortgage, and you do not disclose this to the original mortgage lender. As you’ll find out in a minute, this is something you do NOT want to do.

Legit second mortgages can be beneficial for mortgage buyers who are unable to pay their primary home loan down payments. But it is important to know how and when second mortgages can be considered illegal. 

When are Second Mortgages Legal?

Legal second mortgages are those offered by government programs to help homeowners with their house loan expenses. These are known as down-payment assistance programs.

There are thousands of these programs offered across the U.S. Some you can find through state nonprofits and some you can find through the federal HUD program. They usually are designed to increase home sales in low-to-moderate income areas.

They provide grants to homeowners that can be called a silent second mortgage. They often have zero or low percentage of interest rates. Additionally, their payment schedule is always deferred. 

Despite being recorded, legal second mortgages are only paid by the homeowner once they sell it, refinance it or rent it out. So when do second mortgages become illegal?

When are Second Mortgages Illegal?

Second mortgages become illegal when they are truly “silent”. This means that your bank is unaware of a second mortgage that you have in place to pay your primary loan. 

Unlike a legal second mortgage, one that is silent is offered by private investors. The lender and bank remain unaware of this deal. This is considered “mortgage fraud”. 

To make matters worse, there are silent second mortgages in which a private investor inflates the sale price of the offer beyond the home’s actual value. This effectively increases the first mortgage. 

Consequences of an Illegal Silent Second Mortgage 

Since obtaining a second mortgage through a private lender, as opposed to government programs, is illegal, the consequences are severe. It is even possible that the FBI could get involved.

If the borrower is caught involved in these illegal activities, they could be convicted of mortgage fraud. And the penalty for mortgage fraud is severe. The borrower may be jailed for up to 30 years and may pay fines along with it. 

The bottom line here is that if you are struggling to come up with money for a down payment, it is best to ask for help the legal way. 

Be open with your lender if you plan to have a second mortgage for your down payments. We hope that this article has helped provide you an insight into what is a silent second mortgage and keeps you out of jail! 

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