Silent Second Mortgage

See: Second Mortgage.

It’s a big day for Danny and Sandy: they’re finally ready to buy their first house. They’ve gotten approved for a $400,000 mortgage loan, which is great, but there’s just one itty bitty teensy weensy issue: there is no way they’re going to be able to come up with the $80,000 they need for the down payment on the house. After all, who has eighty grand lying around? Not these two.

Luckily, there's an option by which they can take out an additional loan for the down payment amount. This loan is referred to as a “silent second mortgage.” But before Danny and Sandy get too excited, there are a couple things they should know about these types of loans.

First, they’re called “silent second mortgages” because, historically, these extra loans were taken out without the knowledge of the first lender. This is a big no-no. In fact, it’s more than a no-no; it’s illegal. Why? Because when we get approved for a mortgage, our lender is supposed to know about all additional loans, debt, assets, financial obligations...everything. If we sneak around and get a secret loan to cover our down payment, we’re technically committing mortgage fraud, which means we could end up facing big fines, and even jail time, if we get caught. And that would be...bad.

But there is another way. The term “silent second mortgage” can also refer to a loan-securing practice that is similar, but far less illegal. We’re talking about DPAs, or Down Payment Assistance Programs. These state-supported programs allow homeowners to take out special additional loans specifically designed to help with down payment costs. And while they’re not as “secret” as their illegal cousins—our first lender is totally going to find out about any DPA action we’re involved in—they can make homeownership an achievable dream for folks like Danny and Sandy.

DPA-type silent second mortgages are indeed additional loans, but they usually come with more favorable terms than our loud first mortgage. The interest rate might be lower, and it might not be compounded as often. Also, in many cases, we don’t have to start paying the loan back until we sell the house, which can help make monthly payments easier to manage while we’re in the house. If Danny and Sandy decide to go the (legal) silent second mortgage route, it sounds like they could be enjoying some summer nights in their own backyard in no time.