80 10 10 Loans for Today’s Home Buyer

An 80 10 10 loan is a mortgage option in which a home buyer receives a first and second mortgage simultaneously, covering 90% of the home’s purchase price. The buyer puts just 10% down. This loan type is also known as a piggyback mortgage. It is popular because it helps buyers avoid private mortgage insurance while making a down payment of less than 20%.

A piggyback mortgage is exactly what it sounds like – one mortgage on top of another. This set of two mortgages was commonly used prior to the mortgage crisis to avoid paying private mortgage insurance (PMI), when homebuyers didn’t have a large enough down payment.

Now, this loan combo is much harder to come by. However, it can still be an option for homebuyers with good credit who have at least a 10% down payment and would prefer not to pay PMI.

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The following are general pros and cons of a piggyback mortgage. You will have to run your own numbers to determine whether it’s cost-effective to take out a piggyback mortgage or a traditional mortgage that includes PMI.

Can Purchase a Larger Home

You may qualify for a larger combined loan with this method compared to wrapping both loans into one.

Lower Monthly Payment.

You may save money by avoiding PMI.

Tax Treatment

The interest on a second mortgage or home equity loan is tax-deductible up to $100,000.

Small Down Payment.

With this method, you can avoid PMI with a 10% or even a 5% down payment.

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The requirements to qualify for an 80 10 10 loan are similar to requirements for a traditional mortgage. To take out an 80 10 10 loan, you’ll need:

Good credit

According to credit scoring agency Experian, a good credit score is a score between 670 and 739, a very good score is between 740 and 799, and an exceptional score is 800 – 850. You’ll qualify for the best mortgage rates on an 80 10 10 loan if your credit score is good or better.

Down Payment

As mentioned already, an 80 10 10 loan is an option when the buyer has a 10 percent down payment. To qualify, plan to save at least 10 percent of your home’s purchase price.

Solid Work History

Lenders require a solid work history and a reliable source of income for mortgage loans. You’ll need to supply your lender with a few months of pay stubs and bank statements.

Frequently Ask Questions

If you have a question that deals with clients, customers or the public in general, there is bound to be a need for the FAQ page.

A piggyback loan uses a large loan and small loan that piggyback off one another. The large loan makes up 80 percent of the home’s purchase price, and the second 10 percent loan “piggybacks” off the first. The homebuyer comes up with a 10 percent down payment.

Let’s say a homebuyer plans to purchase a home with a sales price of $200,000. With an 80 10 10 loan, they would take out two mortgages simultaneously – an 80 percent loan for $160,000 and a 10 percent loan for $20,000. To make this loan work, they would need to come up with a 10 percent down payment of $20,000.

If you don’t have a 20% down payment on the home you’re interested in, lenders will generally require that you to pay PMI. This insurance helps protect the lender in the event that your home goes into foreclosure and its value declines to the point that the sale won’t cover the original mortgage.

Since having a larger down payment helps prevent this scenario, you don’t need to pay private mortgage insurance if your mortgage is less than or equal to 80% of your home’s value. Private mortgage insurance hardly benefits you, the borrower, except it can allow you to get into “more” house with less down payment. Otherwise, it’s simply an extra charge that will be tacked onto your monthly mortgage payment.

The amount you’ll have to pay for private mortgage insurance varies depending on how large your loan is, how good your credit is, and how large your down payment is. But a reasonable estimate is that it will cost about 0.5% of your original loan value each year. On a $200,000 loan, that equals $1,000 per year, or $83 per month.

On most loans, PMI can be removed once your home’s loan to value ratio drops below 80%. It’s even tax-deductible for some people. However, avoiding this extra expense will save you money, especially if your income tax bracket is too high to qualify for the PMI tax deduction.

One of the biggest benefits of piggyback loans is that they eliminate the need for PMI, or private mortgage insurance. In case you’re not familiar with PMI, it’s an insurance product you’re typically forced to buy when your down payment on a home is less than 20 percent.

Since PMI typically costs 1 percent the amount of your mortgage each year and lasts until you have 20 percent equity, the costs of this coverage can be substantial. With an 80 10 10 loan, your lender sees your down payment as 20 percent and lets you skirt requirements for PMI altogether.

In the scenario above, the piggyback mortgage is the clear winner in terms of monthly payments. However, this loan program may not be for everyone. There are a few factors to bear in mind:

  • Piggyback mortgages often require a high credit score. You probably need a 680 score to qualify, but that will vary with each lender. Borrowers with a less-than-perfect credit score, an irregular income history or who are using a gift for the 10% down payment will probably need FHA.
  • Piggyback loans may be harder to refinance at a later date. The second mortgage will need to be paid off or subordinated. To subordinate the second mortgage, the lender will need to agree to make their loan second in importance behind the new first mortgage. In some cases, this agreement can be hard to get.
  • There is no streamline refinance option for piggyback mortgages. Expect a longer refinance times than with an FHA refinance.
  • The second mortgage often has a variable rate. In this scenario, the second mortgage is 1.99% above the prime rate (3.25% prime rate was used in this scenario). If the prime rate were to go up, so would the second mortgage rate and payment.
  • The second mortgage is often referred to as a HELOC, or home equity line of credit. HELOC second mortgages often only require interest to be paid each month. So in five or ten years, the balance will be the same if the borrower does not make additional principal payments.
  • You should be prepared to supply documentation for two separate loans as the 80% first mortgage and 10% second mortgage are often placed with two separate banks, each with their own rules.

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