What is a “Silent second”?

Posted by admin on July 26th, 2007 at 12:35pm

Q. Could someone please explain to me the concept of a “silent second”? I think this is something where the buyer may only put down a 5% down, and the seller carries a “silent second”. How does this work, and does this type of deal require PMI? Any comments would be apprecaited.

A. Basically, a slient second is an agreement beween a buyer and a seller that the finance company is not told about. They are borderline legal maneuvers by the buyer and seller, because it usually requires not telling the whole truth during the disclosure phase of the mortgage closing. For example, a buyer has only 5% to ut down, but is going for a loan saying he has put down 20%. In acu uality, there is a paper trail to show that the seller has recieved 20%, but it is really 5% hard cash and 15% “paper” that the seller holds. The bank thinks that the buyer has put down 20% hard cash, and therefore bases their qualifyng ration only on the 80% loan, since they don’t know about payments on the other 15% the seller has taken back. Some buyers “justify” it by saying that once they own the house, they can refinance with a second mortgage, but in fact they are deciving the bank by claiming they’ve put 20% down. It’s done alot, especially with borderline qualifying buyers, but it’s not a good business practice. Hope this helps you out .

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