Owner financing vs silent second

[alvin]

I've been reading up on law and loan fraud and I wanted to know your thoughts on owner carry financing and silent seconds(2nd mortgage note)

Description of a silent second:
These are notes created from the sale of real estate with a seemingly good down payment, a new first loan and the second trust deed or mortgage note. However, the first lender is unaware of the second note, which is where the name "Silent Second" comes in. These notes are usually kept silent because the buyer cannot qualify for a large enough first loan.

An example...

Let's take a look at a real-life example. The buyer purchases a single family home for $135,000. The first lender agrees to make a loan of 80% or $108,000. Therefore, the buyer has to come up with $27,000, right? Normally this would be correct, but not in this case! The buyer and the seller make a side agreement to create a note outside of escrow and without the knowledge of the first lender. They claim the buyer has put down $27,000, but in reality he only puts down $15,000. The buyer gets the first loan for $108,000 and gives the seller a "Silent Second" for $12,000 which is the remaining balance.

The first lender is unaware of both the smaller down payment and the second note for $12,000. If the lender knew about these factors, it would have never approved the loan.

[Greg]

As my career I would not tie myself into these and risk the loss of the ability to lend possibly forever.

This would take some title company cooperation though. In your example the HUD would not balance out and it would likely not fund unless title claims 27k was dp.

The way I see these handled in some cases is they disclose the second to the lender and rip it up post closing using a price increase to cover the money needed by the seller.

Alvin it just is not worth the risk. Most times this is done by brokers who cannot use FHA too. This year FHA changes big time on property evaluations. Less cosmetic items need repaired. Nearly all the blunders of FHA property inspection are erased and re-created close to Fannie Mae.

FHA will do 97% and a 3% dp assist to acheive 100%. A rehab loan to if the property has structural damage. No credit score requirements.

So in the past investors had issues selling to a buyer with FHA financing. Those troubles are supposed to be over now. (1/1/2006)