How Do 80 10 10 Loans Work?
If you’ve shopped for a home or met with a mortgage broker lately, you may have heard of the 80 10 10 loan. This mortgage product, also known as a piggyback loan, is made from a combination of loans meant to help consumers save money.
With an 80 10 10 loan, a borrower takes out a first and second mortgage on their home simultaneously. In addition to the two mortgages, they put down 10 percent of the purchase price. The first loan is typically for 80 percent of the purchase price while the second loan takes care of another 10 percent. Their 10 percent down payment makes up the rest.
Availability of 80 10 10 Loans
While it’s been hard to find a lender that offers 10 percent financing (a second mortgage) in the past, that is no longer the case. These days, banks and mortgage lenders are ready and willing to piece together a piggyback loan for qualifying buyers who can come up with a 10 percent down payment.
While some traditional mortgage lenders have created their own second mortgage programs, others work closely with outside lenders to offer this option. If you’re in the market for a mortgage and think an 80 10 10 loan could be beneficial, you should have no problem finding a lender – or a combination of lenders – to accommodate you.
How Do 80 10 10 Loans Work?
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.
Requirements to Get an 80 10 10 Loan
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.
- Reasonable Debt-to-Income Ratio – The key to figuring out how much you can afford to borrow is determining your debt-to-income ratio, or DTI. Most lenders don’t want your total debts – including your housing payment – to make up more than 36 percent of your income.
How Do Piggyback Loans Eliminate PMI?
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.
PiggybackLoans vs.PMI vs. FHA Loans
Once you’re in the market for a home and a home loan, it’s important to consider each type of loan and their potential benefits. If your goal is avoiding PMI, a piggyback loan can be ideal. However, an FHA loan can also be beneficial if you have a smaller down payment upfront. With an FHA loan, the required down payment is only 3.5 percent.
Which loan comes out on top? Let’s take a look at the three approximate monthly payment options considering a $200,000 mortgage with a 4.75 percent APR and a 10 percent down payment.
|$200,000 Home||80 10 10 Loan||Conventional Loan with 10 percent down||FHA Loan with 10 percent down and upfront MIP|
|Loan Amount on First Mortgage||$160,000||$180,000||$181,530|
|Interest Rate||4.75 percent||4.75 percent||4.75 percent|
|First Mortgage Payment||$834.64||$938.97||$946.95|
|Monthly Payment on Second Mortgage||$20,000 at 4.75 percent = $104.33 per month interest only||PMI equal to 1 percent of mortgage amount annually = $150 per month||FHA MIP = $127.50 per month|
|Property Taxes||$200 per month||$200 per month||$200 per month|
|Property Insurance||$100 per month||$100 per month||$100 per month|
|Total Estimated Monthly Payment||$908.97||$1,088.97||$1,074.45|
As you can see, an 80 10 10 loan is the least expensive option for this particular homebuyer. By avoiding private mortgage insurance (PMI), they’ll save a minimum of $165 a month compared to a traditional loan or FHA loan with the same 10 percent down payment.
When Piggyback Loans are the Wrong Choice
While it’s easy to see why an 80 10 10 loan is the best option for many, there are plenty of scenarios where a piggyback loan is less than ideal. Here are a few signs a piggyback loan won’t work for your home purchase:
- Your credit isn’t great. Since 80 10 10 loans require good credit, you may not be able to qualify if your credit needs work. If you want to see where you stand, you can check your credit score for free.
- You want to refinance in the future. Piggyback loans are notoriously difficult to refinance because most lenders won’t refinance two loans into one. Most of the time, you need to pay off the second mortgage to refinance the first.
- You want to lock in a low interest rate. While the first mortgage on a piggyback loan usually comes with a fixed APR, most second mortgages come in the form of an HELOC. These loans typically come with a variable rate that changes over time. If rates surge across the board, the payment on your second mortgage may become increasingly expensive.
- You don’t want to deal with more than one bank. If your lender farms out your second mortgage to another lender, you’ll have to deal with more than one bank to complete the process. This usually means submitting bank statements and pay stubs twice. You’ll also need to complete two full applications.
- You want your entire loan paid off at the same time. The biggest downside with piggyback loans is that the payment on your second mortgage may be interest only. With an interest only payment, you won’t pay off the principal at all. If you want to pay off your second mortgage as quickly as the first, you’ll need to pay extra toward the principal of your loan each month.