My sister lives in CA and was texting me last night about an offer they made on a house. She mentioned a silent second loan. I've never heard of it.

I've read a little about them online but was wondering if anyone on here has experience with them. Thanks.

Sounds like a California program

The money you put "down" or the down payment on your home loan can be one of the largest hurdles for many first-time homebuyers. That's why CalHFA offers several options for down payment and closing cost assistance. This type of assistance is often called a second or subordinate loan. CalHFA's subordinate loans are "silent seconds", meaning payments on this loan are deferred so you do not have to make a payment on this assistance until your home is sold, refinanced or paid in full. This helps to keep your monthly mortgage payment affordable.

Thanks. When we bought our first house we did an 80/10/10. So a silent second would replace the second loan from my scenario and no payments are made? If she sells the silent second becomes payable with accrued interest? Is that right?

Guess this is a state specific thing. Might be a long shot, but anyone ever done this or had family/friends do it? Any horror stories?

I don't make a habit of giving my sister unsolicited financial advice, but I do worry sometimes about her getting into something she may not understand.

My experience is a silent 2nd is used to inflate the price for appraisal purposes. It is to the seller who then forgives it after closing. It was part of the mortgage fiasco from 10 or so years ago.

Buyer buys house for $100K. Bank loans $80K, no MI. Buyer pays $10K down payment, seller takes 2nd for $10K which is forgiven after closing. Mortgage fraud.

This is not the same at a legitimate 80/10/10.

The seller gives a loan to the buyer and then forgives it after closing? In your scenario then the house actually sold for $90k with $10k down, but it looks like a sale for $100k? Am I interpreting this correctly?

The two responses so far seem to confirm the little that I have read that some forms of this are legit and others are actually illegal.

Guess I need to get some additional info from her.

That's what was happening 10-20 years ago and it's not legit.

Glad to see that we haven't learned from our mistakes.

So here is what I know (I think).

She made an offer on a place that has a main house and a rental unit. Lender pre-approved them for a loan and associated down payment (that they can make) giving consideration to the potential rental income.

Things hit a snag because apparently the title does not include the rental unit. Supposedly the rental is permitted, but not covered/mentioned in the title. I've never heard of this before. Because of this, lender says they cannot give consideration to potential rental income. As a result, the down payment they want for the same total purchase price goes up to a level my sister cannot make.

So now the lender has approved a lower loan amount based on the original down payment which is not enough to cover the offer she made. She asked the seller to loan them the remainder. This is what she is calling the silent second. She says she would make monthly principal and interest payments on the second loan from the seller just like the primary mortgage. Seller would put a lien on the property after she enters escrow (would be subordinate to primary mortgage I think). Lender seems to be aware of all of this and cool with it according to her.

Lender says after two years of rental revenue, they could give her credit for the rental income despite the title issue and she could refinance the second loan. Seller declined this proposal, so maybe this will all go away.

I would never even think of doing something like this, but dying to hear some other people's thoughts.

Yeah, unless disclosed, that sounds a lot like bank/mortgage fraud.

Can someone tell me legally what it means to be disclosed?

Does that mean when she goes to close that she is signing documents that explicitly reference/list this loan as a source of funds with all the terms spelled out?

I assume discussing this with the loan originator or some other person at the lender and them saying it's cool is not sufficient.

How does she make sure she has met whatever the hurdle is for disclosure?

I doubt we would close a 1st lien if this were the case.

Seems to me the confusion here is calling it a silent second. Nothing silent described so far. An owner second lien is fairly common in TX for rural acreages. It sounds like its being disclosed as required to the lender and if they approve then that is that.

I would be concerned about not being on title. I have no idea how her state works but here I would not buy unless I was on title. Seems the seller should work with the title company to clear that up and wrap it all in a neat package.