What are the Benefits of an 80/10/10 Loan and How to Qualify?
80/10/10 loans or Piggyback loans, as they are sometimes referred to, have a lot of benefits. Let us guide you through those and also how to qualify for this loan program.
If you have only a 10% down payment and do not wish to pay private mortgage insurance (PMI), we have the right solution for you – an 80/10/10 loan. This post will give you all the details you need to know.
How does an 80/10/10 loan work?
Usually, a 2nd mortgage or a Home Equity Line of Credit (HELOC) is offered up to 90% of the home value. Such kinds of loans are popularly known as 80/10/10 loans, where the first mortgage is 80 percent of the home value, the second mortgage or Home Equity Line of Credit (HELOC) is 10 percent, and the rest 10 percent is the down payment by the borrower.
What are the benefits of an 80/10/10 loan?
PMI is required on all conventional loans with less than a 20% down payment. So if you had a 10% down payment and you opted for one loan of 90%, you would end up paying PMI. However, an 80/10/10 loan eliminates the need for mortgage insurance.
This could sometimes mean a higher interest rate on the 1st mortgage. Hence, an 80/10/10 loan is not for everyone. Depending on your credit qualification and financial goals, in some cases doing one 90% LTV loan and paying PMI may be a better idea. Contact us for a free consultation so we can guide you on which option is better for you.
Show Me The Numbers:
Example #1 – Using 80/10/10 loan to avoid PMI
Say you are buying a house worth $650,000, and you only have a 10% down payment, i.e., $65,000. You need a loan amount of $585,000. You can get one loan of 90% and pay mortgage insurance on it. Or you can get two loans – 1st mortgage for 80%, i.e., $520,000, and a 2nd mortgage (HELOC) for 10%, i.e., $65,000. You don’t pay mortgage insurance on either the 1st or the 2nd mortgage.
Example #2 – Using an 80/10/10 loan to qualify for a Higher Loan Amount
Say you wanted to buy a $1,300,000 house with only a 10% downpayment. You won’t qualify for any loan if Jumbo loans (loan amounts higher than conforming limits) require a minimum of 20% downpayment. So if your property is in a high-cost area and the conforming limit is $1,089,300 – with a 10% down, your maximum loan amount can’t exceed $1,089,300. But with an 80/10/10 loan, you can buy a $1,400,000 house by putting down only 10%.
The 1st mortgage, 80% of $1.3M, will be within the conforming high-balance limit of $1,040,000 (lower than the max allowed of $1,089,300). The 2nd loan will be $130,000. Thus, helping you to qualify for what would have been a Jumbo loan and would have required a 20% down payment. And by keeping the first loan as a Conforming loan, you are avoiding stricter guidelines regarding credit and reserves that Jumbo loans typically require.
Example #3 – Using an 80/10/10 loan to qualify for a big Jumbo Loan
You can use 80/10/10 loans for purchasing properties as high as $1.7M by breaking the loan into two. The 1st loan is 80% of the purchase price, and the rest 10% is offered as a 2nd mortgage.
Loan Options – Fixed or ARM:
In most cases, the 1st mortgage can be a Fixed Rate or Adjustable Rate Mortgage (ARM). The 2nd mortgage HELOCs are variable-rate lines of credit. The rate on these loans changes every time the Fed changes its Fed Funds rate.
How can I qualify for an 80/10/10 loan?
We offer this loan program for both home purchases and refinance. The property must be owner-occupied. A minimum credit score of 700-740 is required depending on the loan amount you’re applying for.
Example #3 super Jumbo option is available only in California, Oregon, Washington, Arizona, and Nevada. You will need to have 3 tradelines on your credit report (3 active accounts in the last 6 months). And after you have paid your down payment and closing costs, you will need to show reserves for 9-12 months, depending on the loan amount. Non-liquid assets like 401k can be used for reserves as well. 60% of the vested balance can be counted as reserves.
Some of the additional guidelines for the HELOC are mentioned below:
- It’s an adjustable rate loan from day one and can move up or down when Fed changed the funds’ rate
- First 10 years draw period, next 20 years repayment period
*The 80/10/10 loan is not available in all the states*
Email us at [email protected] if you have any questions about an 80/10/10 loan