Getting two mortgages at once is possible with a piggyback loan or 80-10-10 mortgage. The 80-10-10 loan allows you to borrow up to 90% of your home’s value. But how does this work?Welll, it’s simple; your down payment and second mortgage bring the total to 90% of the purchase price, while your first mortgage covers the remaining 10%. This means you can save money on your monthly payments and on private mortgage insurance by opting for an 80-10-10 mortgage instead of the more conventional 20% down payment. It has some drawbacks, though.
So, let’s learn out about the nitty gritty of the 80-10-10 mortgage, as well as the alternatives you may want to consider.
What Exactly Is an 80-10-10 Mortgage?
An 80-10-10 mortgage is one in which the first and second mortgages are obtained concurrently. The first mortgage lien has an 80% loan-to-value (LTV) ratio, which means it is 80% of the home’s cost; the second mortgage lien has a 10% LTV ratio and a 10% down payment.
This arrangement differs from the traditional single mortgage with a 20% down payment.
A piggyback mortgage is an 80-10-10 mortgage.
How Do 80-10-10 Mortgages Work?
When a homebuyer does not have a 20% down payment, lenders typically compensate for the increased risk by requiring them to purchase private mortgage insurance (PMI). That is one application for an 80-10-10 loan. It’s a type of piggyback loan that lets you get a mortgage even if you can’t afford the standard 20% down payment and don’t want to pay PMI.
In some cases, an 80-10-10 mortgage can assist you in purchasing a more expensive home without the need to apply for a jumbo loan, which often has stricter requirements.
The First Mortgage
The first mortgage in an 80-10-10 loan is a conventional loan that finances 80% of the value of your home. It is usually a fixed-rate loan, but you may have the option of choosing an adjustable-rate loan.
The Second Mortgage
The second mortgage covers 10% of the value of your home and “piggybacks” on top of the first loan. Although the interest rate is higher, any interest paid on the second mortgage is tax-deductible (up to IRS limits). PMI premiums, on the other hand, are not. A home equity loan or a home equity line of credit (HELOC) could be used for the second mortgage.
A home equity loan typically has a fixed interest rate and monthly payments that are predictable. A HELOC typically has variable interest rates and functions similarly to a credit card. You withdraw money as needed during a specified time period, known as a draw period, and only pay interest on the amount borrowed. When the draw period expires, you must pay off the remaining balance in full.
The Down Payment
Banks often require a 20% down payment when purchasing a home. If you are unable to come up with that sum, you may be required to pay private mortgage insurance. This additional cost may raise your monthly mortgage payments and make your loan more expensive. However, with an 80-10-10 loan, you only need to put down 10% and pay no PMI, making your monthly payments much more manageable.
Why You Don’t Pay PMI With an 80-10-10 Loan
Private mortgage insurance (PMI) is typically added to your monthly payment if you make less than a 20% down payment on a conventional loan. If you are unable to make payments and default, PMI protects your lender.
You still make a 20% down payment with an 80-10-10 loan. Instead of paying cash outright, you finance 10% with a second mortgage, and the first mortgage lender is not required to charge you PMI.
Example of an 80-10-10 Mortgage
The Kent family wants to buy a $300,000 home and has a $30,000 down payment of 10% of the total home’s value. They will have to pay PMI on top of their monthly mortgage payments with a conventional 90% mortgage. A 90% mortgage will also typically have a higher interest rate.
Instead, the Kents can get an 80% loan for $240,000, possibly at a lower interest rate, and avoid paying PMI. At the same time, they would take out a second $10,000 mortgage. This is most likely a HELOC. The down payment will remain at 10%, but the family will avoid paying PMI, receive a better interest rate, and thus have lower monthly payments.
Four Reasons to Obtain an 80-10-10 Loan
In several ways, 80-10-10 loans can assist you with your home-buying plans.
- You Can Get Rid of PMI. As previously stated, an 80-10-10 loan does not require PMI, costing you $30 to $70 for every $100,000 borrowed.
- You Might Be Able to Forgo Jumbo Loan Financing. If you want to buy a home that requires a loan amount greater than the conforming loan limit in most areas of the country, you’ll need a jumbo loan — this loan type frequently necessitates a higher credit score and down payment than a standard conventional mortgage. An 80-10-10 loan may keep your first mortgage below the conforming loan cutoff, allowing you to avoid the jumbo loan qualification process.
- If You’re Buying, but Your Current Home Has Not Sold, You Can Bridge a Cash Gap. If you’re still trying to sell your current home, an 80-10-10 loan can help you temporarily cover the down payment on a new home. Even better, you can use the proceeds from the sale of your home to pay off the second mortgage without having to refinance.
- You Will Keep More Cash in the Bank, in the Short Term. An 80-10-10 loan keeps more money in the bank, which may be worthwhile if your emergency fund is depleted or you know you’ll need to spend extra money on home repairs. If you expect a large bonus or commission soon after purchasing your home, you could use the extra money to pay off the 10% second mortgage, leaving you with only one mortgage.
The Benefits and Drawbacks of an 80-10-10 Mortgage
While an 80-10-10 mortgage has many advantages, such as allowing homebuyers to purchase a home without a large down payment, these loans also have several disadvantages.
Benefits of an 80-10-10 Mortgage
- Reduced monthly payment: Even if you’re paying off a second loan concurrently, your monthly mortgage payment may be lower because you’re not paying PMI.
- Smaller down payment without PMI: Many lenders will require you to pay mortgage insurance if you can’t make the 20% down payment. With an 80-10-10 loan, you can put down as little as 10% and avoid paying PMI.
- Deduction for taxes: The interest rate on a second mortgage is sometimes higher than the interest rate on a first mortgage, but any interest paid on the second mortgage is tax-deductible up to IRS limits.
- Reduce the time it takes for your home to sell: You may be able to cover the down payment on a new home even if your current home hasn’t sold because you don’t have to come up with a large down payment.
- Avoid a jumbo loan: You can avoid the requirements of a jumbo loan with an 80-10-10 loan if you use the primary loan to finance the first $647,200 of the home price and pay the rest with a secondary loan plus the 10% down payment.
Drawbacks of an 80-10-10 Mortgage
- May make refinancing more difficult: If you decide to refinance your mortgage in the future for a better rate and term, having two loans may make it more difficult to qualify. In fact, before approving your new loan, your lender may require you to pay off your second mortgage.
- A good credit rating is required: To qualify for an 80-10-10 loan, you’ll most likely need a credit score ranging from very good (740-799) to excellent (800-850).
- You are eligible for two separate loans: An 80-10-10 loan requires applying for and qualifying for two separate loans. That means you’ll probably have to meet the requirements of two lenders rather than just one, as you would with a traditional mortgage.
- Closing fees for two loans: If you apply for an 80-10-10 loan through two different mortgage companies, you will often have a separate closing for each loan, with all of the fees and costs involved.
- Increased interest rate: The second mortgage on an 80-10-10 loan will usually have a higher interest rate, which may be adjustable rather than fixed, especially if it is a HELOC. Your monthly payment will increase if the adjustable interest rate rises.
- Increased debt-to-income ratio (DTI): A DTI of 43% or less is preferred by most lenders. Your total monthly debt payments should not exceed 43% of your gross monthly income. Carrying two mortgages (especially if you’re trying to finance a larger home) may push you over this limit. This will make it more difficult to qualify for other loans in the future, such as personal or auto loans, and may even make qualifying for a second mortgage more difficult.
How Do You Get an 80-10-10 Mortgage?
Lenders of 80-10-10 loans examine your finances like traditional mortgage lenders do, except you must prove you have sufficient income, credit, and assets to be approved for both loans. Qualifying for two mortgages is difficult because each loan has its own set of approval criteria. You will require the following items with an 80-10-10 loan:
- A higher credit score is required for the second mortgage. While a 620 credit score is sufficient for a conventional first mortgage, some home equity lenders require a minimum of 660 or 680. An 80-10-10 loan makes no sense if you can’t meet the requirements for both loans.
- Maximum DTI ratio is lower. Second mortgage lenders generally do not want your total debt to exceed 43% of your gross income, as opposed to the 50% DTI ratio allowed by conventional first mortgage lenders.
- There are two sets of closing costs. If you apply for the first and second mortgages through different mortgage companies, you may need to document a little extra cash to get an 80-10-10 loan; this will demonstrate that you can cover the closing costs charged by each company. Lenders who specialize in 80-10-10 loans may offer lower-cost options if they handle both mortgage approvals.
How to Apply for a Second Mortgage
Not every lender provides 80-10-10 mortgages. As part of an 80-10-10 loan structure, there are typically two ways to obtain a second mortgage.
- Find a lender who provides both types of mortgages. Lenders who specialize in purchase loans frequently offer 80-10-10 loan programs in which both loans are approved concurrently. You should still shop around for rates — different lenders have different relationships with second mortgage lenders, and they may even offer you a cost-saving discount for their 80-10-10 loan.
- Choose two different lenders. You can shop for your first and second mortgages separately using a comparison tool or by contacting three to five lenders and comparing loan estimates. Make sure to notify your first mortgage lender that you are taking out an 80-10-10 loan — lenders are required to pay an additional fee if you take out two mortgages at the same time, which is typically passed on to you as a higher interest rate on the first mortgage.
How Do You Get an 80-10-10 Mortgage?
Some lenders provide 80-10-10 loans in which both the primary and secondary mortgage loans are approved concurrently. However, it’s just as likely that you’ll need to find separate lenders for the first and second mortgages. Not every lender provides 80-10-10 loans.
When you apply for an 80-10-10 loan, lenders, like any other mortgage, examine your financial situation. They will look over your credit score, credit history, DTI, and employment history to ensure you have enough income to make payments on two loans. As previously stated, you will almost certainly need a very good to excellent credit score to qualify.
Alternatives to an 80-10-10 Mortgage
If an 80-10-10 mortgage isn’t right for you, other options exist.
Increase Your Down Payment
If you can afford it, you might as well bite the bullet and put down the standard 20% down payment. You’ll have a lower loan balance to repay over time and possibly more loan options with better terms. A larger down payment also means paying less interest and making lower monthly payments. If you don’t have enough money saved to put down 20%, consider waiting until you do before looking for a home.
Government-Insured Loans
The Federal Housing Administration insures FHA loans, which may only require a 3.5% down payment depending on your credit score. FHA loans, however, require mortgage insurance and may have slightly higher interest rates than conventional loans.
The US Department of Veterans Affairs guarantees VA loans. They do not require a down payment from eligible service members, qualified veterans, or surviving spouses and do not require PMI. VA loans may also have lower interest rates and terms than traditional bank, credit unions, or mortgage lender loans.
USDA loans are zero-down mortgages offered by the United States Department of Agriculture to qualified low-income rural and suburban homebuyers. They, like VA loans, have competitive interest rates.
Pay Private Mortgage Insurance
If your PMI payments are less than your second mortgage payments with an 80-10-10 loan, you may have to bite the bullet and pay for private mortgage insurance. However, lenders are required to cancel PMI on your loan once you have 22% equity in your home or are halfway through paying off your mortgage.
Obtain a Jumbo Mortgage
If you want to buy a significantly more expensive home than most in your neighborhood, you should consider a jumbo loan. Because these large loans do not meet Fannie Mae and Freddie Mac loan limits, they are riskier for lenders. As a result, lenders typically have stringent eligibility requirements for these loans, such as a high credit score and a 20% or greater down payment.
Conclusion
If you don’t have the required 20% down payment and want to avoid paying PMI, an 80-10-10 loan could be the solution. However, you must have excellent credit to qualify. Check your credit report and credit score at Experian on a regular basis to see how your credit stacks up. You can also use the mortgage calculator to determine whether this type of loan will save you money over a traditional mortgage that requires PMI.
Related Articles
- What Is Mortgage Insurance and When Do You Need It?
- JUMBO MORTGAGE LIMIT: Jumbo Mortgage Limit 2023
- WHAT IS A JUMBO MORTGAGE? Rates and Limits In 2023
- How To Avoid PMI (Private Mortgage Insurance): Detailed Guide
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