Not a fan of PMI, otherwise known as private mortgage insurance?
Neither are a lot of homebuyers.
That’s why the 80-10-10 mortgage loan is gaining in popularity. It gives you a way to put 10% down, yet avoid the extra expense of PMI.
Ready to make a low down payment AND avoid PMI? Then you need to read this whole article.
What's in this Article?
What’s an 80-10-10 loan?
An 80-10-10 loan is a loan structure in which you take out an 80% primary mortgage, a 10% second mortgage, and put 10% down. Because the primary mortgage is 80% of the purchase price, private mortgage insurance is not required.
This infographic explains it well.
According to lending rules, you need a 20% down payment to avoid PMI. With this structure you finance half your 20% down payment.
It sounds strange that the first mortgage lender would still count the 10% second mortgage as part of your down payment, but that’s how the rules work. As a homebuyer, you might as well take advantage of it.
80-10-10 piggyback loan pros and cons
Unfortunately, not many buyers consider an 80-10-10 in this market, but that could be due to lack of awareness about the program. It does come with some considerable benefits, but some drawbacks to be aware of as well.
Lower cost, maybe: The biggest potential advantage is that it could be cheaper than getting one loan for 90% of the home’s price. But, take this ‘pro’ with a grain of salt because it’s not always cheaper. Sometimes it’s more affordable to get a single 90% loan with PMI.
So if you have 10% down, it’s wise to have your lender run both scenarios. One could be better than the other depending on your credit score, long-term goals, and other factors. We’ll talk about cost more later.
No PMI: Some homebuyers just don’t like the idea of paying PMI. That’s understandable. It’s a considerable monthly fee that benefits your lender, not you.
If something happens and you can’t make the payments, PMI kicks in to pay back the lender any losses. You still lose the home, though.
Now, keep in mind that private mortgage insurance does benefit you by allowing you to buy a house without 20% down. That’s a huge advantage. Yet, some homebuyers are still PMI-averse, and that’s fine.
The 80-10-10 piggyback mortgage lets you put just 10% down and avoid PMI at the same time.
Could be easier to reduce monthly costs: With an 80-10-10, you can pay off your 2nd mortgage and get rid of that extra payment any time. Not so with PMI.
Certain loan servicers (the company where you send your payment) make you wait a few years to cancel PMI, even if you’ve paid to loan down or your home’s value has gone up. You may need to spend hundreds of dollars for a new appraisal or even thousands of dollars on a refinance to cancel PMI.
So if you’re getting a big bonus at work, an inheritance, cashing in stock options, or selling a previous home soon, you may want the 80-10-10 option so you can pay off the 2nd loan and be rid of that payment, no questions asked.
Every loan option has its ‘cons’ so let’s talk about those.
You need good credit: The second mortgage typically requires better credit than the primary mortgage. So if your credit has some blemishes, you may consider an FHA loan or a conventional loan with PMI.
Qualify for two mortgages: You need to qualify for two sets of loan guidelines, not just one. The second mortgage usually comes from a separate lender which may have different rules for its loan.
Adjustable rate second mortgage: The second mortgage will probably come with an adjustable rate that is based on the current prime rate. In a rising rate environment like today’s, your second mortgage rate may rise. Still, the payment will likely not become unmanageable since the loan is for just 10% of the property price. You can still get a fixed-rate mortgage for the 80% portion.
Simultaneous closing: Make sure your lender is experienced in closing piggyback loans. They need to manage a dual closing. Both the primary and secondary mortgages need to close on the same day, or your purchase could be delayed.
Two separate payments: You will pay two payments each month to separate lenders. But in today’s online banking auto-pay world, that’s not a big deal. Just set up recurring payments.
Qualifying for an 80-10-10 piggyback loan is a bit harder than for a standard conforming mortgage. That’s because the second mortgage is considered higher risk, so comes with higher rates and more stringent approval requirements.
And, even if you get approved for the primary mortgage, there’s a chance the second mortgage lender won’t accept your application.
The minimum credit score for a primary conventional mortgage is 620, though some mortgage lenders require an even higher score. But the second mortgage lender may require a 680, 700, or even higher.
Lenders will also look at your DTI. If you have significant non-housing debts, such as high credit card balances, a car payment, and outstanding personal loans, they may see you as high-risk by adding on two housing loans on top of that debt stack.
Related reading: PMI on a Conventional Loan: Your Questions Answered
Piggyback loans vs FHA vs Conventional with PMI
Below is a rough comparison of the three loan types discussed. Click here to get a personalized quote for each option.
|$300k Home Purchase||80-10-10||90% FHA||90% Conv. w/PMI|
|First mortgage||$240,000||$274,725 (incl. upfront FHA MIP)||$270,000|
|Has mortgage insurance?||No||Yes||Yes|
|Has 2nd mortgage payment?||Yes||No||No|
If an 80-10-10 piggyback loan is not an option for you, there are other ways to save. And there are a number of no and low down payment loan programs that, while they do involve some form of mortgage insurance, could be the right financial moves anyway.
A conventional 97 loan, for instance, allows eligible homebuyers to purchase a home with 3% down. The 97 refers to your loan-to-value ratio (LTV): 97% borrowed and 3% down.
You will pay PMI on a conventional 97 loan. But on the flip side, it may be easier to qualify for one of these loans than for an 80-10-10 piggyback loan, especially if you have good but not excellent credit or your DTI is on the higher end.
And the sooner you purchase a home, the sooner you will start building home equity, which is a major factor in growing your wealth.
Remember, PMI isn’t forever. You can request that it be removed when you achieve 20% home equity, and you may be able to make extra mortgage payments if you want to be aggressive in your repayment timeline and hit 20% sooner.
When you reach 22%, the PMI requirement falls off automatically; you don’t need to contact your lender to request it.
There are also government-backed loans that allow you buy with little down:
- USDA loans: 0% down
- FHA loans: 3.5% down
- VA loans: 0% down for eligible homebuyers with full entitlement benefit
Not every lender can do an 80-10-10 loan. It requires having access to the second mortgage provider, which some lenders don’t. Even fewer lenders are experienced enough to guide both loans through the process and close on time.
Fortunately, Home.com’s parent company offers these loans and is experienced in them.
80-10-10 piggyback loans FAQs
An 80-10-10 piggyback loan translates to: a first mortgage for 80% of the sale price; a second lien for 10%; and a 10% down payment. The second mortgage “piggybacks” on top of the first.
Yes, 80-10-10 piggyback loans are still available. Not all lenders offer them or will allow you to use them to buy a home, so if you’re interested in this option, ask your lender if they offer it before you apply. It may even be possible to obtain an 80-15-5 piggyback loan, depending on your lender.
Lenders typically require higher credit scores for piggyback loans, since taking out a first and second lien represents more risk than a single loan. They may also look for lower debt-to-income ratios to ensure you can afford both monthly payments.
Borrowers who don’t have 20% down and who want to avoid paying PMI could benefit from an 80-10-10 piggyback loan. But there are many loan options out there. To find the right one, get started finding your right program now.
*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.