Definition and Examples of a Silent Second Mortgage
A silent second mortgage, sometimes called a soft second or subordinate mortgage, is when borrowers take out a separate loan to assist with the costs of obtaining a primary mortgage for real estate. There are different methods for acquiring a silent second mortgage.
- Alternate names: Soft second mortgage, subordinate loan, second mortgage assistance program, unreported second mortgage, forgivable second mortgage
For example, if you found a home you wanted to buy and couldn't afford the 20% down payment, you could take out a loan from a private lender and make the payment, as long as you tell your mortgage lender about it.
How Silent Second Mortgages Work
Silent second mortgages often come in the form of government programs that help homeowners with down payment costs. These mortgages may have a 0% interest rate or a low-interest rate and typically have a deferred payment schedule. Even though the second mortgage is recorded, the homeowner doesn’t pay on it unless or until they sell the home, refinance the mortgage, or rent it out. Some silent mortgages are completely forgivable after a certain number of years, as long as the borrower fulfills the loan terms.
With legal silent second mortgages, several federal, state, community, and non-profit programs are available to help borrowers with the funds needed to buy a home.
Borrowing money from a private lender for a down payment is a form of mortgage fraud if you do not inform your primary lender and can result in prosecution. However, it is more likely that the lender would find out about the silent second mortgage, and you'd lose your primary mortgage.
It is against the law to obtain a silent second mortgage without your lender’s knowledge to pay for the costs of obtaining a primary mortgage, such as the down payment.
“The key is, the lender has to know about it. It’s not illegal if you tell the mortgage lender,” says Melanie Scott, Mortgage Broker with CreekView Mortgage in Cottonwood Heights, Utah, who has closed hundreds of mortgages with a silent second.
One example of a silent second mortgage is associated with a Department of Housing and Urban Development (HUD) program called the Good Neighbor Next Door (GNND). The GNND program allows eligible full-time law enforcement officers, teachers, firefighters, and emergency responders to purchase an eligible home at a 50% discount if they agree to live in the home for a three-year period. These homes are typically in revitalization areas.
To make this discount work, 50% of the loan is underwritten as a primary mortgage. This first mortgage includes closing costs and other fees. The other 50% is underwritten as a second mortgage serviced by HUD. The second mortgage is called a soft or silent second mortgage and is closed immediately after the first loan, yet homeowners only pay on the first mortgage.
After the three-year residency requirement is met, the soft second mortgage is released by HUD, and a mortgage satisfaction letter is filed with the county recorder’s office. The second mortgage no longer shows up on the borrower’s title.
Programs may offer a discount or an amount of money to help with the down payment and closing costs associated with buying a home. This discount or down payment assistance often comes in the form of a silent second mortgage.
How to Get a Soft Second Mortgage
To get a silent second mortgage yourself, you should research programs and find professionals knowledgeable about the program to work with.
- Find a program: These can come from various sources, including individual communities, the federal government, state programs, and nonprofit organizations. Search for “down payment assistance” programs online. Also, contact your local housing authority for help finding programs.
- Find knowledgeable professionals: As they require extra knowledge and paperwork, it is essential to find real estate and mortgage professionals familiar with these programs. Not only can they help you qualify for a loan and assistance, but they can help you find a home that will qualify. A good lender or real estate professional should be able to take you through the entire process from start to finish.
Alternatives to Silent Second Mortgages
Borrowers unable to qualify for a government program have other options.
A piggyback loan is also a second mortgage, but it isn’t “silent.” Using a piggyback loan is common if you can't qualify for a jumbo loan.
A jumbo loan is one that exceeds the conventional conforming loan limit, which is $647,200 for 2022 in most of the U.S., and generally requires a higher credit score and lower debt-to-income ratio than a conventional loan.
With a piggyback loan, the first mortgage is a conventional loan and comprises the majority of the home’s value (typically around 80%). The second (the piggyback loan) covers the remainder minus the down payment. Borrowers may also save on monthly primary mortgage insurance payments by using a piggyback loan.
One difference between a piggyback mortgage and an illegal silent second mortgage is that the lender knows about it. When the lender is aware of a piggyback mortgage, they can fairly evaluate your finances and ability to pay both loans back.
A family member, charitable organization, or others are often allowed to give you the funds you need for a down payment. However, to be considered a gift, there cannot be a requirement to pay the money back. Different types of loans have different requirements, but in general, you’ll need to provide a gift letter or other documentation that supports the gift is simply a gift, with no expectation of repayment.
- Legal silent second mortgages often come in the form of community-sponsored programs that help buyers with the funds needed to obtain real estate.
- Illegal silent second mortgages attempt to conceal the origin of money obtained in order to qualify for the primary mortgage.
- Borrowers have alternatives if they need help financing a mortgage, including piggyback loans, down payment assistance programs, and gifts.
- Borrowers interested in programs with legal silent second mortgages should find professionals to help guide them through the process.