What is the nature of a 'sneaky second', and does this apply?

Okay, I’m confused about the term ‘sneaky second’. Is that when you use a second mortgage, right around closing time, to come up with the supposed down payment for the home?

Say you bought a house with a market value of 100K, but only paid 70K. You put in a down payment, say 20k, and then get a mortgage for 50k. Now you’re sitting on 50k of equity (100k - 70k + 20k). If you go and use that as a HELOC or take a second mortgage out to get your equity back in your hands (presumably to buy another house with), is that a ‘sneaky second’? Is that even a problem?

I beleive the term “sneaky second” refers to when you as the seller increase the sales price of your property and agree to take a second back for the buyer. However, you never intend to collect on the second because you get your profit from the increased sales price. This causes a lender who thinks they are lending at 90% to actually lend at 100% and is considered loan fraud.

okay, so if I find a property worth 100k, buy it for 80k, put zero down, i’d have 20k equity. Can I just get a 2nd mortgage and push it to 100LTV?

(oh btw those figures are generic and intentionally exclude fees for the mortgages, etc, for simplicity’s sake. I’m basically concerned with how easy it is to pull out the cash from a bargain purchase that you just got)

Never heard of the term sneaky second, but in terms of getting that extra 20k out, it’d be hard to do. Most lenders have seasoning requirements of at least 6 months to a year. Otherwise they just go by the purchase price. In your case, if the property is still worth 100k after a year, then you’d have no problems getting a second mortgage. Usually the rates are pretty good if you go to 90% LTV, but not that great once you hit 95-100% LTV.

I believe the term is “silent second” and it as reauctions described it. However there are legal silent seconds. This occurs when a housing agency or someone else lends a down payment and doesn’t require payments on it until the first is paid off, the property is refinanced, or sold.

So the seasoning requirement woudl be the original mortgagee’s stipulation, saying that I can’t get a 2nd mortgage pushing it to 100LTV, within a specified time period? Is this a uniform requirement, or do different lenders/mortgagees have differences/absences of this requirement?

When you buy it with 0 down, you’re already at 100% LTV. There is no original mortgagee’s stipulation, it’s the bank’s that you’re borrowing the second mortgage from stipulation. They most likey will not lend on something that is already at 100% LTV. Their requirements are that they go by the purchase price if it’s been less than a year. You may find other banks that don’t have this requirement, but their interest rates are probably higher.

You have to see it from the bank’s perspective, if you did an arms length transaction (ie neither side knew each other and it was a voluntary transaction) and only paid 80k, then the house must really only be worth 80k, not the 100k claimed by the appraisal. The appraisal is only an estimate of value. Must have been off. Now why would the bank lend you another 20k especially if that means that when they try to sell the house, they’re only going to get 80k?

Bottom line is that it isn’t easy to pull cash out of a bargain. The only other way to save cash would be to have the seller pay closing costs so you don’t have to bring any money to the table. That way you get the property for $83k and get 3k back for closing costs.

I have never heard it coined as “sneaky second”, but I think the OP means “silent second” (it’s when you get a seller second that is not recorded on title and the 1st lien investor is unaware of the agreement).

If this is the “sneaky” the OP refers to, it’s a no-no (mortgage fraud).


Scott Miller

Actually, there are many investors available that will not require time on title to the property to be seasoned to use the full appraised value.
The most common is actually Fannie Mae/Freddie Mac. Even though they are generally first mortgage lenders, theoretically you could buy a house for 80k that appraises at that time for 100k, then turn around and use 100k for your value on a refinance immediately.
There are also many second mortgage lenders that will allow full appraised value to be used immediately, the problem is that they typically will cap investment properties to 80 or 85% of the market value, so you would not be pulling all that cash back out.

What if it wasn’t an investment property, but rather your primary residence? Would the cap still be 80-85%?

Just to make sure I’m on the right page, basically I need to make sure that if I want to take out the equity (that I got by buying at a discount), I need to have a loan that has no ‘seasoning’ time limit? If they say they have a 3 month seasoning (am I using the lingo properly? lol) period, does that mean I’m bound by that mortgage to wait 3 months til I can pull equity out?

I’m basically interested in buying a house, using a HELOC / second mortgage to take the profit out with, and use that for a down payment on another, the ole’ domino approach (which isn’t the least risky of approaches, I acknowledge)


Silent 2nd: where the seller/2nd lienholder has a note in 2nd position but does not have it legally recorded, though they do intend on collecting payments.

Hollow 2nd: where the seller agrees to hold a 2nd note on the property, but never intends on collecting on that debt.

Both are used in different situations and both are illegal if the primary lender is not made fully aware of them (and usually they aren’t).

Now that that is settled.

If you buy a property worth $100K for $50K and you get $50K in financing, then you’ve just received 100% LTV (that’s loan to value) because the “value” is the purchase price.

Bottom line is that it isn’t easy to pull cash out of a bargain.
Actually its very easy to pull money out of a bargain (see example above). What’s hard is pulling money out of supposed bargain (like paying $80k on a $100k house).

And you’re free to invest as you choose, but rational investors NEVER, NEVER finance more than 80% of true value. You always want to leave yourself some space, just in case you need it. Also, if you are planning on renting, I’ve never seen a rental cashflow if it’s been financed 100% of value.