Finding the right home loan can be tricky for even the most experienced home buyer. There are simply so many things to take into consideration. Deciding on the type of interest rate, figuring out how much of a down payment you can afford, and even choosing the loan program are enough to make anyone’s head spin.
Then there is the matter of whether or not you even qualify to borrow the amount you need to purchase your home. And if you do, will you be stuck paying for private mortgage insurance? Some parts of the home buying process simply can’t be helped. But there is a solution to those last two issues.
The 80-10-10 loan, a form of combination loan, is the solution in question. An 80-10-10 loan is actually two separate loans used to cover the cost of a home purchase. The first loan covers 80% of the purchase price. The second loan covers another 10% of the price. The remaining 10% is to be paid by the borrower as a down payment.
80-10-10 Loan Basics
Born from the combination loans of days past, the 80-10-10 is the modern equivalent of a mortgage structure introduced to help homebuyers purchase a home with no money down. The original product still involved two separate loans, however the second loan was meant to cover the remaining 20% left over after the primary loan covered 80%. These 80-20 loans involved a primary mortgage, and a HELOC to piggyback off of it.
It wasn’t until the revered housing slumps that the structure had to be updated. Lenders realized that no money down housing lead to many homeowners walking away from their homes in times of financial crisis. This lead to the modern 80-10-10 loan we have today, where borrowers are expected to make a 10% down payment as part of the transaction.
80-10-10 loans are mainly popular among homeowners looking to avoid jumbo loans, circumvent private mortgage insurance (PMI), or in some cases, purchase a new home prior to selling their current home. These loans are often called piggyback loans, since they require two loans, one to take the brunt of the home value, and a second smaller loan that handles a smaller portion, thus “piggybacking” off of the first loan. There are many variations to this structure, including a 75-15-10 loan and many more.
Not too long ago, 80-10-10 loans were quite hard to get, since lenders rarely wanted to waste time financing 10% of anything, including homes. Now, however, combination loans have risen in popularity, and more lenders are willing to push forward with the double home loan. Some lenders even partner with other lenders or banks, each servicing one of the two loans.
Uses for an 80-10-10 Loan
It is easy to believe that two loans in place of one is just some money grabbing scheme to trick home buyers into paying more interest. While scams of that nature do exist, the 80-10-10 loan isn’t one of them. That's not to say that each loan doesn’t have interest to contend with, but the uses for the 80-10-10 structure are what make it so appealing.
Eliminating Mortgage Insurance
Let’s face it. No homeowner is thrilled with the idea of mortgage insurance. Anything that raises a monthly mortgage payment any more than it should be is just plain evil, right? So needless to say, anything that can be done to rid a home buyer of the burden of mortgage insurance is nothing short of a miracle.
Quite miraculously, that is exactly what an 80-10-10 loan can do. You see, most conventional loans require mortgage insurance if the preferred down payment of 20% isn’t met. With the 80-10-10 loan, it just so happens that that second loan for 10% of the purchase price brings your total contribution towards the home to a whopping 90%!
And just like that, PMI is a thing of the past.
Circumventing a Jumbo Mortgage
The more clever home buyers found out an even more interesting use for the 80-10-10 loan. For the more expensive home purchases, non-conforming Jumbo loans are typically the way to go. Jumbo loans, for those who aren’t in the know, allow home buyers to take out much larger mortgages -- well above the conforming loan limits set by Fannie Mae and Freddie Mac.
The problem is that jumbo loan eligibility requirements are set by the lender and are virtually unregulated, leading it to be quite a tedious process to obtain one. That said, with jumbo loans in excess of $450,000, who could blame a lender for being cautious? Often times, jumbo loans require exorbitant down payments, pristine credit scores and proof of cash reserves that most conforming mortgages don’t even require.
That’s why many home buyers have turned to the 80-10-10 loan in an attempt to sidestep the hassles associated with jumbo home loans. For loan amounts over the conforming limits, breaking apart the loan amount between two loans not only makes it possible to get a more expensive home by conventional means, but it also lowers the down payment necessary. It’s a win-win!
Benefits of an 80-10-10 Loan
Many home buyers have realized that 80-10-10 loans can be quite beneficial. They are a great option for many home buyers in a pinch, looking to work around the strict loan programs that permeate the industry.
80-10-10 loans are perfect for escaping cumbersome mortgage insurance fees, and can help home buyers who can’t produce that 20% down payment reduce it to an impressive 10%. Needless to say, this alone is enough to make a piggyback loan worthwhile.
For home buyers looking to avoid the super strict eligibility requirements of a jumbo loan, 80-10-10 loans are probably the best alternative on the market. The high loan amount simply gets split between the two loans, and the home buyer is only responsible for coming up with a 10% down payment.
Drawbacks of the 80-10-10 Loan
As awesome as 80-10-10 loans sound, they aren’t without a few drawbacks. The most obvious problem is that the 80-10-10 structure, or any piggyback loan for that matter, requires borrowers to qualify for and close two loans instead of one. Anyone who has undergone the home loan process before knows that one mortgage transaction can be frustrating enough.
A lesser-known problem with 80-10-10 loans is that refinancing them can be a bit tricky. The reason is that typically, refinancing the primary loan requires the approval of the lender servicing the secondary loan. Sometimes, this can be a lot of back and forth until an agreement is reached.
Lastly, with 80-10-10 loans, the secondary loan is usually a HELOC, which comes with its own problems. For starters, payments on HELOCs are usually interest-only. This makes building home equity a much slower process than with the average home loan. In addition, HELOCs are known to have variable interest rates, which may go up over time, costing homeowners more than they bargained for.
80-10-10 Loans: In Review
80-10-10 loans, and all of its other piggyback loan counterparts are an exciting option for many a home buyer. While they are not for everyone, it is clear that they serve their purpose when they are utilized correctly.
Home buyers with excellent credit who don’t mind doubling up on the home loan process can accomplish a lot with an 80-10-10 mortgage. They are a great way to avoid the hassle of private mortgage insurance, which can be troublesome when added to monthly mortgage payments. 80-10-10 loans allow home buyers to sidestep the 20% down payment requirement that leads to mortgage insurance by covering 10% with the secondary loan, leaving only 10% left up to the borrower.
As if that weren’t awesome enough, borrowers can completely circumvent the need for jumbo loans with the two loan structure of a piggyback loan. This allows home buyers to purchase more home, with less eligibility hoops to jump through.
If you’re looking to purchase a home, be sure to discuss with your lender whether an 80-10-10 loan would be best for your situation. As always, you can always contact the mortgage specialists at home.loans for expert home loan advice.