What is this Silent Second Mortgage Fraud?

Question

Hey BP!

If i have a private investor that is willing to lend me a down payment on a property how do you structure it to not consider it a silent second fraud? For instance, if a friend gave me 20,000 for a down payment and we both agreed he would get 6% for 5 yrs and then at 5yrs he would get the 20,000 back, is this considered silent second? Please help with a better understanding so i don't get myself in trouble.

Thanks Everyone!

Cal C. · Answer

Look at it from the lender's side.  Someone who has put 20% of their own money is much more likely to pay off a loan than someone who has put nothing down.  For evidence of this look at what happened in 2008-9, see the term strategic walk away.  Thus it makes the same loan substantially more risky for the lender.

Jay Hinrichs · Answer

Chris Mason  in this instance I highly doubt this OP has other real estate.. he is simply looking for a 100% leveraged deal. IE he has no money and wants to buy a property.

I think you can get a gift from your parents.. ?

Other wise simply save up the money over time

Wayne Brooks · Answer

.......and not revealing the debt is mortgage fraud......just hope nothing ever goes wrong with the loan.

Jon Holdman · Answer

Many times the lender will have you sign a statement stating none of the down payment is borrowed.  If you say it is borrowed, they won't make the loan.  If you say it isn't, you're committing fraud.

Chris Mason · Answer

Note that if you do the above, it needs to be a real loan that you actually intend to abide by. When qualifying for future mortgages, they will ask for proof that you've been paying this private mortgage on time for the last 12 months.

Chris Mason · Answer

You can secure the debt by some **other** real estate (I think **technically** you could secure it by a car, but don't quote me on that), disclose it to the lender, make it recorded and official as a mortgage on that other property (or car???), and then it's allowable.

You'd need to qualify with that debt being calculated into your DTI.

This doesn't come up frequently enough that I have the exact guidelines memorized. In fact, I've only actually done it once, and in that case I basically made up hypothetical terms/conditions/rate/etc of the loan with Fannie's guidelines open over here (left side of desk) and me making up a loan program  completely out of thin air over there (right side of desk), and both of the other folks were just like "eh ok that can be the terms/condition/rate/etc whatever that's cool" and went with my made-up-out-of-thin-air proposed loan program. (I'm going to say that again: I DO NOT HAVE THE EXACT GUIDELINES MEMORIZED, so get tight with your go-to conventional lender that reads guidelines & can tell you ALL the small print before making any moves).

The first lender isn't going to fund until the funds for this other mortgage have made it into escrow (wired directly to escrow, never touching your accounts), and likely it will have to be recorded at the county too. It's 100% official as a mortgage. All of this needs to be disclosed to underwriting department of your main lender on day 1.

The advantage of doing it this way rather than just seasoning the funds:

- Your private lender buddy actually has some assurances that they will get paid back because it's secured by real estate, which means they should be willing to offer you a better rate. HELOCs are just secured credit cards.... think of your normal Visa credit card's interest rate v your HELOC's interest rate. Ya, exactly.

- You're not breaking any rules.

Pavel Sakurets · Answer

Only deal with commercial loans that local banks provide and finance a purchase under business name, within 15 years I was NEVER asked about the source of dp. If you get a loan under your name, then it becomes an issue.

If your friend gave you money, dont record a mortgage with him, but give him a private promissory note without giving him a mortgage

Anita Verma · Answer

If you hold the money from the investor for 2 months prior to going under contract, then you are fine. The lender only asks for the past 2 months of bank statements, he doesn't ask for the source of money in your accounts prior to this. This is what my lender told me. I am talking about loans that get sold on the secondary market, portfolio lenders have their own rules.

Richard Villandry · Answer

@Jon Holdman If the bank wont make the loan how can you work with the private lender to make it easier for the bank to be ok with the deal. Do you have to have the private lenders name on the loan also? I was really trying to do a owner occupied multi in which i would borrow the down payment from an investor i know. Possibly going FHA with a low down payment, any suggestions?

Wayne Brooks · Answer

Forst of all, the lender will require evidence of where your down pay,ent is coming from.  And yes, not revealing the additional will be fraud,mouse to the paper work you fill out, including a listing of any of other debts.

What is this Silent Second Mortgage Fraud?

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