How Does an 80-10-10 Loan Work?
If you don’t have the cash for a 20% down payment, you can still avoid private mortgage insurance (PMI) by getting an 80-10-10 loan. This involves three steps:
- Taking out a primary mortgage for 80% of the home’s price
- Getting a second mortgage for another 10%
- Making a 10% down payment
Knowing how an 80-10-10 loan works can help you decide if it’s the right option for your homebuying journey.
- An 80-10-10 mortgage involves taking out two separate mortgages (a first mortgage and a second mortgage), which means you’ll have two monthly payments.
- The second mortgage is usually either a home equity loan or home equity line of credit (HELOC) that covers 10% of your down payment.
- Getting an 80-10-10 loan can help you avoid private mortgage insurance (PMI).
How 80-10-10 loans work
An 80-10-10 loan is a combination of two mortgages used to purchase a home, along with a 10% down payment. These loans — also known as piggyback mortgages or combination loans — break down as follows:
1. The first mortgage
Most borrowers opt for a fixed-rate first mortgage to ensure stable monthly payments. You can choose an adjustable-rate mortgage (ARM) if you want a slightly lower initial rate for a set time, but the payment could become unaffordable when the interest rate later adjusts.
2. The second mortgage
You can choose a home equity loan or HELOC. A home equity loan is paid out in a lump sum and has a fixed interest rate and predictable monthly payments.
In contrast, a HELOC is like a credit card secured by your home — you can withdraw money for a set time called the “draw period.” HELOC rates are usually variable, and in some cases you can even make interest-only payments during the draw period. Once that period ends, the balance will need to be paid off in monthly installments.
3. The down payment
You’ll need to document your down payment funds just like you would for a regular mortgage. Lenders may allow you to use a down payment gift, as long as the donor provides a gift letter and documents where the money came from.
If you make less than a 20% down payment on a conventional loan, the cost of private mortgage insurance (PMI) is typically added to your monthly payment. PMI protects your lender if you can’t make payments and default on your mortgage.
With an 80-10-10 loan, you’re still making a 20% down payment. Instead of using all cash, though, you’ll finance 10% with a second mortgage and the first mortgage lender won’t charge you for PMI.
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80-10-10 mortgage pros and cons
Pros
- You won’t pay for private mortgage insurance.
- You may avoid a jumbo mortgage.
- You can pay off the second mortgage, leaving you with only one mortgage payment.
- You’ll leave more money in your bank account.
- You can deduct the mortgage interest on both loans.
Cons
- You’ll have two monthly mortgage payments.
- You’ll pay higher rates for second mortgage options.
- You’ll likely have a variable interest rate if you choose a HELOC.
- You’ll pay closing costs on two mortgages.
- You’ll pay a higher rate on the primary mortgage.
80-10-10 loan requirements
Just like traditional mortgage lenders, 80-10-10 lenders scrutinize your finances and require you to have satisfactory income, credit and assets to get approved for both loans. Qualifying for two mortgages is complicated, however, since each loan will have its own set of approval guidelines. With an 80-10-10 loan you’ll need:
- A higher credit score for the second mortgage. While you’ll only need a 620 score to qualify for a conventional first mortgage, some home equity lenders require a 660 or 680 minimum score. If you can’t meet the requirements for both loans, an 80-10-10 loan won’t make sense.
- A lower DTI ratio maximum. Second mortgage lenders generally don’t want your total debt to equal more than 43% of your gross income, compared to the 50% debt-to-income (DTI) ratio maximum that conventional first mortgage lenders often allow.
- Two sets of closing costs. You may need to document a little extra cash to get an 80-10-10 loan if you apply for the first and second mortgage through different mortgage companies — this will show you can cover the closing costs each lender charges. If you choose a mortgage lender that specializes in 80-10-10 loans, you may have access to lower-cost options if they handle the approvals for both mortgages.
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How to get a second mortgage
Not all lenders offer 80-10-10 mortgages. There are usually two ways to get a second mortgage as part of an 80-10-10 loan structure.
- Find a lender that offers both mortgages. Lenders that specialize in purchase loans often offer 80-10-10 loan programs with both loans approved together. You should still comparison shop — different lenders have different partnerships with second mortgage lenders, and may even offer you a discount toward costs for an 80-10-10 loan.
- Pick two different lenders. You can shop for your first and second mortgage separately by using a rate shopping tool or by contacting three to five lenders and comparing their loan estimates. Be sure to let the first mortgage lender know you’re taking out an 80-10-10 loan — lenders are required to pay an extra fee if you take out two mortgages together, which is typically passed on to you as a higher mortgage rate on the first mortgage.
80-10-10 loan example
Let’s say you want to buy a home for $350,000 and have a 10% down payment ($35,000). With a traditional mortgage, putting down less than 20% means you’ll pay for PMI, which increases your monthly mortgage payments.
Here’s how an 80-10-10 loan can help you make a 20% down payment, even if you only have 10% saved:
- Take out a first mortgage for $280,000 (80% of the purchase price)
- Take out a second mortgage (a HELOC, for example) for $35,000 (10%)
- Make a $35,000 down payment (10%)
Since you’re making a 20% down payment (10% cash and 10% HELOC), you won’t need to pay PMI.
Should you get an 80-10-10 loan?
There are several reasons to consider using 80-10-10 loans in your homebuying plans:
- You can avoid paying PMI. As detailed above, you don’t pay PMI with an 80-10-10 loan — otherwise, it can cost you about $30 to $70 for every $100,000 you borrow.
- You could skip a jumbo loan. If you’re buying a home that requires a loan amount above the conforming loan limits in most parts of the country, you’ll need a jumbo loan — this loan type often requires a higher credit score and larger down payment than a standard conventional mortgage. An 80-10-10 loan may keep your first mortgage below the conforming loan cutoff, so you won’t have to jump through extra qualifying hoops.
- You can bridge a pending home sale cash gap. An 80-10-10 loan can help you temporarily cover the down payment on a new home if you’re still trying to sell your current home. Even better: You can use the profits from your home sale to pay off the second mortgage without refinancing.
- You’ll have more short-term cash. An 80-10-10 loan leaves more cash in the bank — it may be worth it if your emergency fund is running low, or if you know you’ll need to spend some extra money to fix up the home. If you’re expecting a large bonus or commission soon after purchasing your home, you could clear out the 10% second mortgage with the extra money, leaving you with just one mortgage.
The main purpose of 80-10-10 loans is to avoid PMI by making a 20% down payment (10% in cash and 10% from a second mortgage). A bridge loan is a temporary financing solution that taps into your current home’s equity, helping to finance the purchase of a new home before you sell your existing one. The key difference is timing: an 80-10-10 loan is part of your long-term mortgage strategy, while a bridge loan is a short-term option that you’ll typically have to repay within six to 12 months.
80-10-10 mortgage loan alternatives
If you can’t qualify for an 80-10-10 loan and don’t have the cash for a 20% down payment, you can try these low-down-payment options:
- FHA loans. The Federal Housing Administration (FHA) insures loans for borrowers with scores as low as 580 and a 3.5% down payment, and 500 with a 10% down payment. However, you’ll have to pay expensive FHA mortgage insurance, which will last for as long as you have the loan if you make the minimum down payment.
- VA loans. Eligible military borrowers may qualify for a no-down-payment loan backed by the U.S. Department of Veterans Affairs (VA). VA loans don’t require mortgage insurance, but there is a VA funding fee.
- Down payment assistance. Local, state and national down payment assistance funds may be available in your area. This assistance gives you extra help with upfront money to buy a home. In some cases, you can even combine your own funds with down payment assistance to avoid or reduce your mortgage insurance costs.
If all else fails, you can buy a cheaper home, or wait until you’ve stockpiled a bigger down payment to purchase a home.
Frequently asked questions
Your mortgage lender(s) will initiate the foreclosure process on an 80-10-10 loan if you fall behind on your payments.
Securing a piggyback loan can be more challenging than getting a traditional mortgage, since it involves qualifying for two different loans. You’ll need to prove that you can afford to repay both loans. Credit score and DTI ratio requirements vary by lender, so it’s a good idea to shop around.
The main risk with 80-10-10 mortgages is the potential strain on your finances, since you’re taking on two monthly payments. Further, if you use a HELOC as the second mortgage, your rate might be variable, meaning your monthly payments could increase if interest rates rise.
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