Looking for a way to avoid private mortgage insurance on a home loan without putting 20% down?
Private mortgage insurance (PMI) is great because it allows lenders to offer mortgages with less than 20% down, even down to 3%.
However, PMI is typically between 0.5-1.5% of your mortgage, and it can add thousands of dollars in costs over the life of the loan. Some borrowers are reluctant to take on the expense.
Enter the 80-10-10 loan. With an 80-10-10 – a.k.a “piggyback” – loan: an 80% first mortgage, 10% second mortgage, and 10% down. The second mortgage “piggybacks” onto the first.
The combination of the second loan and down payment allows you to avoid the PMI requirement on conventional loans with less money upfront.
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You have two options for buying a home with an 80-10-10 mortgage.
First, you can take both the first and second loans with the same lender. This can simplify the process, since it may be easier to coordinate the closing date and loan disclosure requirements.
But you can also take the second loan with another lender, though you must disclose the loan to the primary mortgage lender. You cannot take out the second loan before closing on the first and simply put the proceeds toward your down payment. Why? Because your primary lender needs to know all of the debts you’ve taken on and on which you’ll be paying in addition to your mortgage loan.
Your debt-to-income ratio (DTI)* is a key factor in whether a lender will approve you for a loan and for how much. Trying to “hide” the second loan, or taking out a “silent second” that your lender doesn’t know about, constitutes mortgage fraud, according to the FBI.
Bottom line: You must disclose all debts to your lenders.
You will also need to coordinate the closing of the loans, since you are using funds from the second loan to secure the first. If you use two different lenders, talk with them about how to ensure the closings will coincide. A late closing can cause you to owe financial penalties and even lose the new home.
The second loan
The 10% second loan typically comes in the form of a home equity loan or home equity line of credit (HELOC), depending on the amount of equity available in the property being purchased.
Homebuyers who opt to take their second loan as a HELOC may keep the line open even after it’s paid off. HELOCs can be a handy way to cover expensive home maintenance, repair, and replacement costs, such as a new roof or heating system. So having that line available may provide some peace of mind.
“The 80-10-10 can be a good option so the buyer can have a 30-year fixed-rate mortgage” without PMI, said Heather K. McFadden, broker and owner at Morganelli Properties in Hellertown, Pa. “The bad part is that the second lien usually has a higher [interest] rate and a shorter term.”
The primary mortgage is known as the “first lien,” and the 10% loan is the “second lien.”
Second liens on 80-10-10 piggyback loans can also be adjustable-rate mortgages. That means the interest rate can fluctuate — up or down — so the monthly payment can go higher or lower as well.
That variability may make some homebuyers uncomfortable, especially if they prefer to have steady payments to budget for each month.
In that case, they may want to consider getting one loan with 10% down. That requires PMI, but mortgage insurance is generally inexpensive with that much down payment.
Plus, the PMI requirement ends when you reach 20% equity.
At that time, you can request that your lender remove the PMI requirement. Once you have 22%, the requirement falls off automatically. By putting down 10%, you’re nearly halfway there.
Qualifying for an 80-10-10 piggyback loan is a bit harder than for a standard conforming mortgage. Since you’re taking on two separate loans and will not be paying PMI — which helps safeguard lenders in case of non-payment or default — banks often require higher credit scores for piggyback loans.
And, even if you get approved for the primary mortgage, there’s a chance the second mortgage lender has tougher qualification standards.
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
80-10-10 piggyback loans can be good options if you have great credit, low debts, and significant savings. There’s a reason the average down payment these days is 6%. Saving up a large down payment is difficult, especially for first-time homebuyers who may also be paying off student loans or other debts.
But if you have enough money saved for a 10% down payment and you can qualify for both a first and second lien, an 80-10-10 piggyback loan can help you avoid PMI and potentially save money long-term.
PMI vs a second mortgage
However, make sure to consider the big picture. If you have an adjustable-rate second lien, could the interest you pay end up negating any PMI savings? Ask your loan officer to run the scenarios for you so that you don’t pay more than necessary.
For example, it might be a better value to accept PMI at $150 per month rather than a second mortgage at $250 per month. But a second mortgage could be cheaper, too. PMI costs depend on your credit score; second mortgage costs depend on the interest rate of that loan. You may also need an appraisal at the borrower’s cost to confirm the value is met to have PMI removed from the loan.
A second mortgage comes with advantages over PMI, though. You’re paying down loan principal with a second lien. That’s not true of PMI payments.
Additionally, if you expect a large bonus or plan to cash out your crypto earnings, you can pay off your second mortgage, no questions asked. To eliminate PMI, you have to contact your servicer and ensure you are paying down your mortgage balance enough for PMI removal.
Plan for two payments
If you do opt for an 80-10-10 mortgage, have a plan for how you’ll stay ahead of having two monthly mortgage payments.
Paul Marrella, a certified financial planner at Raymond James Financial Services in Wyomissing, Pa., recommended that borrowers who opt to take an 80-10-10 piggyback loan calculate the PMI amount they would have paid, and put that amount toward paying down the second 10% loan.
Setting the money aside and paying down the loan early on can create needed breathing room in the future.
“At least you have the flexibility and if hard times come, you aren’t paying – or having difficulty paying – the two loans,” Marrella said of working to retire the second lien.
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 that it end.
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
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 preapproved and find out which products are available to you.
*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.