Increasing home prices in today’s market have made 8/10/10 piggyback loans a popular option for borrowers who need to borrow more than the conforming loan limit and need a Jumbo Loan. Let’s delve into what a piggyback loan is, how it operates, and how to decide if it’s the right choice for you!
Piggyback loans allow homebuyers to finance a home purchase with two mortgages at once – a primary mortgage for the bulk of the amount, and a second, smaller mortgage to cover the remaining balance. This unique lending strategy comes with pros and cons, but the key question for many home shoppers is – is it difficult to actually qualify for and get a piggyback home loan?
While piggyback loans offer the ability to avoid private mortgage insurance (PMI) or reduce your down payment, they aren’t always easy to get Lenders view financing 80-90% of a home purchase as risky, so you’ll face stricter requirements compared to a standard mortgage
Here’s a look at the key challenges borrowers face when trying to get a piggyback home loan, and tips for boosting your chances of approval
You’ll Face Tougher Credit Requirements
To qualify for a piggyback mortgage, expect to need a strong credit profile. Most lenders require a minimum credit score around 700 for this type of financing. Some may approve borrowers with credit scores as low as 680, but it’s less common.
The lender views borrowers with excellent credit as lower risk and more likely to repay both loans as agreed. If your score falls below 700 take time to improve it before applying. Pay down balances, dispute errors on your credit reports and make payments on time.
Your Debt-to-Income Ratio Must Be Low
Lenders also scrutinize your debt-to-income (DTI) ratio when you apply for a piggyback loan. DTI compares your total monthly debt payments to your gross monthly income.
Aim for a DTI of 36% or lower when pursuing this loan type. Some lenders may accept DTIs up to 43%, but the lower you can get your ratio, the better. Pay off credit cards, auto loans and other debts to reduce your DTI prior to applying.
You’ll Need a Large Down Payment
While piggyback loans allow you to avoid a 20% down payment, you’ll still need to bring a sizable amount to closing.
The standard 80/10/10 loan requires 10% down, but some lenders offer 80/15/5 programs with just 5% down. While this reduces your cash requirement, it makes approval more difficult.
Come ready with 10-15% of the purchase price in savings if you want the best shot at getting a piggyback mortgage.
Your Income History Will Be Verified
Lenders want to confirm your income is stable enough to support repayment of two mortgages. Expect your employer to be contacted to verify your employment history, salary, position and likelihood of continued employment.
Having at least two years in your current job or the same field helps satisfy most lenders. Gaps in employment or frequent job changes can hurt your chances of approval.
Your Savings and Reserves Will Be Checked
Most lenders require three to six months’ worth of mortgage payments (for both loans) in cash reserves when approving a piggyback mortgage. Money in your checking and savings accounts may be verified.
Bring extra savings to the table. The higher your reserves, the more confident the lender becomes in your ability to manage both loan payments.
You’ll Deal With Two Sets of Closing Costs
Closing costs are the upfront fees charged to finalize your loans. With two mortgages, expect to pay closing costs twice.
Typical fees include origination charges, application fees, title searches, surveys, home appraisals, credit checks, attorneys fees and more. Closing costs often total 2-5% of your loan amount.
Refinancing Could Be Challenging
If you use separate lenders for each mortgage, refinancing down the road can be difficult. You’ll have to refinance both loans independently, with likely different terms, rates and timelines.
To simplify, choose the same lender for your primary mortgage and secondary piggyback loan. This streamlines the process if you refinance later.
Alternatives May Be Easier to Obtain
Down payment assistance programs, FHA loans, USDA loans and VA loans allow buyers to purchase with minimal cash down and more flexible credit requirements.
These mortgage programs make qualifying easier than piggyback loans. But they may come with location restrictions, homebuyer education requirements and the need to pay mortgage insurance.
Tips for Improving Your Chances
While piggyback loans are tougher to get, these tips can help your chances of getting approved:
- Pay down debts to reduce your DTI ratio
- Boost your credit score above 700
- Save up a sizable down payment, 10-15% or more
- Choose the same lender for both mortgages
- Keep money in reserves to show savings
- Document steady income with consistent job history
The bottom line? Yes, piggyback mortgages can be challenging to obtain compared to conventional financing. But with diligent preparation of your finances and a prudent lending approach, you can overcome the hurdles to get approved. Speak to loan officers to discuss your specific situation and steps to take to better your odds.
See how much you can afford.
Your approval amount will give you an estimate on how much house you can afford.
What is a piggyback loan?
A piggyback loan is a two-part financing strategy where you take out two mortgages simultaneously. First, you secure a primary mortgage, which typically covers around 80% of the home’s purchase price. Then, a smaller second mortgage “piggybacks” on top, functioning like an extra boost for your down payment.
This second mortgage, often a Home Equity Line of Credit (HELOC), helps you reach the 20% down payment threshold. By achieving this threshold, you avoid private mortgage insurance (PMI), which adds an extra cost to your monthly payment.
Piggyback Loans – What are they and who offers them?
FAQ
How do you qualify for a piggyback loan?
To be eligible for an 80/10/10 piggyback loan, you must meet the requirements for both the first and second mortgage. The first mortgage, usually a conventional loan, requires a minimum credit score of 620, while the HELOC part of the piggyback loan may require an even higher credit score, typically around 680 or more.
Is a piggyback loan a good idea?
Piggyback loans can result in higher overall interest costs (they typically come with higher rates than traditional mortgages). They also come with two sets of closing costs, and they can make it challenging to refinance.
Is it difficult to get a loan for a second home?
Yes, getting a mortgage for a second home is more difficult than for your primary residence. Mortgage requirements for a second home typically include larger down payments and higher cash reserves. Additionally, you must meet the lender’s debt-to-income ratio, which includes payments on both properties.
Are loan modifications hard to get?
The modification process can be tedious, and it varies for all borrowers, depending on the type of income they earn, what their credit report looks like, and so on. It also can depend on the competency of your point of contact with the department (some are incompetent).