our everyday life

How to Do an 80-10-10 Mortgage

by Christopher Raines

An 80-10-10 loan, also known as a piggyback loan, is an alternative financing option when you cannot afford a 20 percent down payment on the purchase of a home. You borrow 80 percent of the purchase price for the first mortgage; the remainder is split between your 10 percent cash down payment and a second loan for 10 percent of the purchase price. This is a way to avoid paying private mortgage insurance, or PMI, that your lender might otherwise require.

Find a lender that offers piggyback mortgages or a home equity loan for down payment assistance. Some lenders may make both the 80 percent and 10 percent loans. Contact your state or local government housing department or agency, or a community-based group about down-payment assistance, especially if you have moderate or low income; many of these programs provide secondary financing at low interest rates and even allow you to defer payment.

Obtain preapproval from your primary lender to determine the loan amount that you qualify for and, thus, what you can pay for a house; this drives the piggyback loan and your out-of-pocket down payment. Provide your lender your with the requested paperwork, such as the last two years' W-2s, 1099 income statements and federal income tax returns; recent bank statements, pay stubs and other evidence of your income. You may have to pay for a credit report as part of the preapproval process. A lender can prequalify you for a loan amount, but this represents an estimate of what you can borrow rather than a loan commitment by the bank.

Apply for the first and second loans, especially if you have not been preapproved, at or near the same time so that you can pay for the home at closing. Each lender will run your credit history and confirm the accuracy of your employment, income and asset information and other statements on your application.

Bring a cash down payment of 10 percent of the price to the closing. Consult with your lender for acceptable sources of down payment. Generally, you may draw from a savings or other bank account, your 401(k) plan, or stocks and gifts from family members.

Tips

  • As an alternative to a second mortgage, you can raise the 20 percent down payment and avoid PMI from your savings, 401(k) or other sources allowed by the primary lender.
  • Some piggyback loans allow you to borrow 15 or 20 percent the home price, reducing or eliminating what you must raise out of your own funds for the down payment.
  • Use a piggyback mortgage calculator to compare the payments of a conventional loan with PMI to the 80-10-10. Depending on the terms of the loans, you may save more money by paying PMI than obtaining a piggyback loan.
  • Reduce your credit card or other debt; the ratio of outstanding debt to your credit limits counts for 30 percent of your score. Ask your lender for a Rapid Rescore when you pay off debt.

Warnings

  • You may have to contact several lenders to find one that is willing to do a piggyback mortgage.
  • Required minimum credit scores vary by lender, but, as a rule of thumb,the minimum score on the second mortgage is typically higher than on the first mortgage.

About the Author

Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.

Photo Credits

  • Comstock/Comstock/Getty Images