Silent second mortgages are mortgages taken out without the knowledge of the first mortgage holder, often used to finance a down payment. While legal, they can be used fraudulently and violate the original mortgage contract, putting both lenders at risk in case of default.
Silent second mortgages are mortgages taken out on properties that already have mortgages. With this particular approach, the holder of the first mortgage is unaware of the existence of this new second mortgage. Although legal in many parts of the world, this type of agreement can easily be used to structure fraudulent real estate deals.
One of the most common reasons for obtaining a second silent mortgage has to do with financing a down payment when a person wants to buy a property. For example, the original mortgage lender may require the homeowner to make a payment of twenty-five percent of the purchase price in exchange for extending the loan to cover the remaining seventy-five percent. If the homeowner only has ten percent of the required amount, he or she can apply for a silent second mortgage as a means of meeting the terms and conditions associated with the first mortgage extension. Instead of the original lender being aware of this agreement, the second loan is secured without disclosing the existence of the loan to the first mortgage holder.
Assuming the homeowner can pay off the silent second mortgage in a short period of time, while maintaining monthly payments to the first mortgage lender, the strategy allows the real estate purchase to be made without causing any hardship to any of the three parties. involved. If the debtor is having trouble paying either mortgage, this could lead the holder of the first mortgage to realize the situation. Depending on the laws that apply in the area, the owner could be found guilty of fraud.
The reason a silent second mortgage is sometimes considered fraudulent is that taking out that second mortgage without the knowledge and consent of the original lender violates certain provisions found in the original mortgage contract. Additionally, the existence of an undisclosed second mortgage has a negative impact on the original lender, as he or she is at greater risk on the loan than previously thought. In the event the homeowner defaults on either mortgage, the potential to lose money on the loan is much greater, as the two lenders must now work together to declare the loans delinquent and find a way to liquidate the property. as part of recovery. In situations where the value of the property has decreased since the original purchase, both the original mortgage holder and the silent second mortgage holder may have to settle for less than the amount owed to them.
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