Piggyback loans for today’s home buyer
A piggyback loan is a way to save money by using two mortgage loans, instead of one loan, to buy a house.
Why use a second loan when one is all you really need? Because the second mortgage covers part of the down payment for the first mortgage, meaning you can reap the benefits that come with making a larger down payment.
By increasing the down payment amount, the borrower can save money. For example, paying 20% down eliminates the need for private mortgage insurance premiums.Check your 80-10-10 mortgage eligibility. Start here (Feb 7th, 2023)
How do piggyback loans work?
Piggyback loans are also called 80/10/10 loans, and if you’re wondering how these loans work, all you have to do is follow the numbers:
- 80: Represents the first mortgage, which finances 80% of the home’s purchase price.
- 10: Represents the second mortgage, which finances another 10% of the home’s price. This 10% counts toward the buyer’s down payment.
- 10: Represents the cash down payment provided by the buyer.
With this scenario, a buyer can benefit from a 20% down payment while paying only 10% down out of their own pocket.
There are other types of piggyback mortgages besides 80/10/10s, such as an 80/5/15, and 75/15/10. The second number always describes the second mortgage, and the third number describes the buyer’s cash down payment.
The second loan is often a home equity line of credit (HELOC), or home equity loan.
Are 80/10/10 loans available?
Many mortgage lenders offer piggyback financing in 2023.
Lenders have always offered the first mortgage — the 80% portion of the home’s purchase price. In the past, it was harder to find a lender for the 10% second mortgage.
Due to the popularity of the program, many lenders have created their own second mortgage program. Some lenders have also built relationships with other lenders to secure second mortgage financing for the home buyer — making it one seamless transaction as far as the buyer is concerned.Check your piggyback loan eligibility. Start here (Feb 7th, 2023)
How do piggyback loans eliminate PMI?
Normally, private mortgage insurance, or PMI, is required when borrowers pay less than 20% down on a conventional loan.
With a piggyback loan, however, borrowers can put only 10% down but still get credit for a 20% down payment. The second mortgage provides the other 10% of the 20% down payment amount.
Why get two loans just to avoid PMI? Because PMI costs borrowers money, and the premiums protect the lender — not the borrower.
The PMI price tag varies by borrower. Annual premiums usually range from 0.5% to 1.5% of the primary mortgage amount each year. On a $300,000 first mortgage, 1% would equal $3,000 a year or $250 a month.
Other benefits of a piggyback mortgage loan
Eliminating PMI isn’t the only reason buyers like piggyback loans. This financing strategy can also:
- Help lower interest rates: A bigger down payment lowers the primary mortgage’s loan-to-value ratio (LTV), and a lower LTV will often help buyers dodge higher interest rates
- Keep loan within limits: Freddie Mac and Fannie Mae set conforming loan limits each year. A bigger down payment could keep your loan amount within this year’s limit, avoiding a non-conforming jumbo loan
- Save cash for closing costs: Even if you could afford a 20% cash down payment, parting with only 10% can leave room in the budget for closing costs, moving expenses, or new furniture
- Help you buy a new home while selling your old one: Some buyers pay off their piggyback’s second mortgage quickly — after selling another home, for example. They use piggybacking so they can buy with 20% down before selling their other home
A lot of interrelated factors will affect your home-buying budget. By increasing your down payment, piggyback loans can move more of these factors in your favor.
Types of piggyback loans
80/10/10 loans are the most common type of piggyback loan, but they aren’t the only type. Buyers can also find:
- 80/15/5 piggyback loans: This version shifts more of the financing burden onto the second loan, allowing buyers to bring only 5% to the closing table
- 75/15/10 piggyback loans: This piggyback loan increases the second mortgage by 5% so the buyer can put 25% down on the primary mortgage
As you can see by the numbers, these variations divide the home’s cost between the two mortgages differently. Otherwise, they work like any other piggyback loan: A second mortgage helps cover the down payment on the first mortgage.
80/10/10 vs 75/15/10
A piggyback loan’s variations aren’t random. There’s usually a reason behind the size of each loan.
For example, some homes — such as condominiums — may need a 25% down payment instead of 20% down. In that case, a 75/15/10 piggyback would be the way to go. This scenario could help with some investment property down payments, too.
For most single-family home buyers, an 80/10/10 piggyback offers just enough down payment support.
How to qualify for a piggyback loan
Compared to conventional loans with all-cash down payments, piggyback financing will require a higher credit score. That’s because you have to qualify for a second mortgage (a home equity loan or HELOC) on top of your primary mortgage.
Many lenders look for scores of 680 or higher for a second mortgage. That’s 60 points higher than the typical 620 score needed for a conventional loan.
Another qualifying factor for piggyback financing is debt-to-income ratio, or DTI. The payment amount for both loans — the primary mortgage and the second mortgage — will be factored into your DTI. DTI also includes your credit card minimum payments, auto loans, and student loan payments.
All these monthly debts, including your two house payments, can’t exceed 43% of your monthly gross income for most lenders.
Alternatives to a piggyback loan
If a piggyback loan’s credit score and DTI requirements won’t work for you, consider one of these alternatives:
- 10% down conventional loan: Buyers don’t need 20% down to get a conventional loan. Even with 10% down, you could get a competitive interest rate. You’d pay PMI but only until you’ve paid the loan down to 80% of the home’s value
- FHA loan with 10% down: FHA loans let buyers with average credit and lower down payments access lower interest rates. With 10% down, you can stop paying the FHA’s mortgage insurance premiums (MIP) in 11 years
Some buyers can also get USDA loans or VA loans which require no money down, but not everyone is eligible. USDA loans have income and geographical limits; VA loans are reserved for military service members.
Is an 80/10/10 less expensive than an FHA loan?
The minimum down payment for an FHA mortgage is just 3.5%. However, buyers can make a bigger down payment if they wish, and a 10% down payment on an FHA loan can save money in the long run.
If you have 10% to put down, should you use an FHA loan instead of piggybacking?
Before deciding, consider the FHA’s mortgage insurance premium (MIP), which charges 0.8% of the loan amount each year on a 10% down loan. For a $350,000 home, that’s $210 per month.
The MIP is required for the first 11 years of the loan with a down payment of 10%. With a smaller down payment, MIP is required for the life of the loan.
In addition to this monthly mortgage insurance cost, FHA charges a one-time upfront mortgage insurance premium of 1.75% of the loan amount. These closing costs can add up and make a piggyback mortgage cheaper than FHA.
But mortgage lending is personal. What’s true for most borrowers isn’t true for all borrowers. Some borrowers can save with an FHA loan, especially if their credit score is borderline — just high enough to qualify for piggyback financing.
The best way to find out for sure? Compare preapproval offers from several lenders to see which type of financing is most affordable for you.Check your piggyback loan eligibility. Start here (Feb 7th, 2023)
Piggyback loans vs PMI vs FHA loans
If you’re making a cash down payment of less than 20%, you might be looking at three popular loan options: a piggyback loan, a conventional loan with private mortgage insurance (PMI), or an FHA loan with mortgage insurance premiums (MIP).
In a three-way match-up, which mortgage product comes out on top? Let’s look at an example of a home purchase of $350,000 with 10% cash available to put down.
|$350,000 Home||80/10/10||10% down conventional (one loan)||FHA with 10% down|
|First Mortgage Loan Amount||$280,000||$315,000||$321,125 (incl. upfront MIP)|
|Example Interest Rate*||6.75%*||7%*||7%*|
|First Mortgage Payment||$1,816||$2,095||$2,136|
|2nd Mortgage or Mortgage Insurance Cost||$35,000 second mortgage at 7.5%*. $416/mo||PMI: $250/mo||FHA MIP: $210/mo|
|Est. Property Taxes||$250||$250||$250|
|Est. Homeowners Insurance||$80||$80||$80|
*Rates are only examples and are not taken from current rate sheets. Your rate may be higher or lower. Click here to request current rates.
In this scenario, the piggyback mortgage saved the buyer $113 per month compared to a conventional or FHA loan.
Again, your actual experience will depend on the rates you qualify for based on your credit score, debt-to-income ratio, and income level. Your mortgage lender can help you run the numbers and compare costs for each option.Check your piggyback loan eligibility. Start here (Feb 7th, 2023)
Why doesn’t everyone do a piggyback loan?
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 when making this financial decision:
- 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 or conventional financing.
- Piggyback loans may be harder to refinance later. Before refinancing, the second mortgage would need to be paid off or subordinated. To subordinate the second mortgage, the refinance lender would 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, making refinancing more difficult.
- There is no Streamline Refinance option for piggyback mortgages. Expect longer refinance times compared to an FHA refinance.
- The second mortgage rate is often variable and based on the current prime rate. As rates rise, so will the second loan’s payments.
- The second mortgage is often referred to as a HELOC, or home equity line of credit. Some HELOC second mortgages require only 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.
- Each loan will likely have its own terms, requirements and rules. 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 lenders, each with its own rules.
Piggyback loan pros and cons
Pros of piggyback loans
- Lowers monthly payments for many home buyers
- Avoids PMI with only 10% cash down payment
- Can get a primary mortgage within conforming loan limits
Cons of piggyback loans
- Second lien on the home from day one
- Second loan often has a variable rate
- Requires a higher credit score
Piggyback loan FAQs
What is a piggyback loan?
With piggyback loans, home buyers can use a second mortgage loan to boost the down payment on their first, or primary mortgage loan. For example, a buyer could bring a 10% cash down payment and use a second mortgage to generate cash for another 10% down. The combined 20% down payment avoids PMI.
What is the advantage of a piggyback loan?
Because they simulate a 20% down payment conventional loan, piggyback loans eliminate the need for private mortgage insurance. The bigger down payment can also keep the primary mortgage within conventional mortgage limits, eliminating the need for a jumbo mortgage on high-value real estate.
How does a piggyback mortgage work?
A piggyback loan is two mortgages: A conventional mortgage that’s normally a fixed-rate loan and a second mortgage that’s often an interest-only home equity line of credit. The second loan provides part of the down payment on the first loan.
Is it hard to get a piggyback loan?
It’s gotten easier to find lenders who allow piggyback loans. Borrowers need higher credit scores — usually FICO scores of 680 or higher — to get approval. Both loan amounts must fit within the borrower’s debt-to-income ratio, or DTI.
Are piggyback loans still available?
Yes. In fact, they’re easier to find since they’re in high demand. Some lenders will offer both mortgage loans. Others will recommend lenders for the second mortgage.
Piggyback or traditional? Which loan is right for you?
Home buyers need to make their own decisions about which loan type is best based on factors like future financial goals, credit score, home price, and their down payment. A loan officer can help you determine the best fit for your financial situation.