What is an 80-10-10 Loan?
An 80-10-10 loan is a mortgage loan that allows a borrower to obtain a large home loan without some of the penalties. A potential borrower may have a new job with high income or assets that have a high market value. They may not have a large enough down payment for the home they want to buy because their assets are not liquid at the time of application for the mortgage. An 80-10-10 loan can help solve that problem. There could be other scenarios that could cause a borrower to seek an 80-10-10 loan.
How do 80-10-10 Loans Work?
The 80-10-10 loan is really two loans and is sometimes called a piggyback mortgage. The first loan is simply a mortgage loan for 80 percent of the home’s purchase price. The second loan is for 10 percent of the purchase price and is a second mortgage. It may be a simple second mortgage, or a home equity loan or home equity line of credit (HELOC). The borrower then makes a down payment for the last 10 percent of the purchase price.
The 80-10-10 loan allows borrowers to avoid jumbo loans which can be more expensive and difficult to obtain. The loan also helps them keep from paying private mortgage insurance which can be a significant expense.
What are the Advantages and Disadvantages of 80-10-10 Loans?
What We Like
Borrowers can avoid jumbo loans which are more expensive and harder to obtain.
Borrowers can avoid paying expensive private mortgage insurance which is assessed if the mortgage is greater than 80 percent of the home’s value.
What We Don't Like
Interest Rates depend on the economy, which can sometimes be a bad thing
Credit Score needs to be high to be considered
Your financial history will be thoroughly examined
This type of loan is hard to refinance
Below are a few things to keep in mind when applying for an 80-10-10 loan:
- Interest Rates – The interest rate for the first mortgage may be fixed or variable. The interest rate of the second mortgage or home equity loan is usually variable and changes with the level of interest rates in the economy. This can be a disadvantage if the Federal Reserve is in a period of raising interest rates or if there is an inflationary economy.
- Credit Score – The borrower’s credit score usually must be higher than for a mortgage that is not piggybacked since there are two mortgages for which the bank is at risk and they want to be as secure as possible.
- Documentation of Financial History – The borrower should be prepared to produce several years of income tax returns, income history, and the market value of real and financial assets. Two sets of documentation may even have to be provided since it is possible that the first mortgage and second mortgage or home equity loan would be provided by two different lenders. Those two different lenders could ask for different types of documentation.
- Debt to Income Ratio – The debt to income ratio can seldom be more than 43 percent for a first mortgage. The ideal ratio is 36 percent. The higher the debt to income ratio for the first mortgage, the lower the amount of the second mortgage will likely be.
- Difficulty in Refinancing – The 80-10-10 loan is difficult to refinance. The second mortgage or home equity loan usually must be paid off before a lender will refinance this type of piggybacked loan.
What is Private Mortgage Insurance?
Private mortgage insurance (PMI) offers the lender the protection that if the home goes into foreclosure and must be sold, and the sale does not cover the original mortgage, the lender won’t take a loss. A borrower does not typically have to pay PMI if the mortgage is less than or equal to 80 percent of the home’s value because the down payment is larger. That helps increase the lender’s protection.
Private mortgage insurance is an extra charge added to the borrower’s monthly mortgage payment. The amount of PMI is usually 0.5 percent of the amount of the first mortgage and, with a large mortgage, can be substantial. PMI doesn’t apply once a home’s value drops below an 80 percent loan to value ratio. This is the reason 80-10-10 loans are attractive to borrower’s who are interested in high dollar mortgages and that have low down payments.
The Availability of 80-10-10 Loans
Before the Great Recession of 2008-09, this type of loan was widely available at very favorable terms. Down payments were often not even required, and the home was 100% financed. During and after the recession, banks and other lending institutions tightened up their lending standards. Down payments were required, and applicants were screened more thoroughly.