A Piggyback Loan is actually the second mortgage loan after the first mortgage is used to finance one property. A Piggyback Mortgage loan combines two mortgages for buying or refinancing a home. Homebuyers often use Piggyback Mortgages to avoid paying Private Mortgage Insurance (PMI) on a conventional loan when putting down less than 20%. Borrowers with low down payment savings use Piggyback Loans to qualify for mortgages without having to pay for the Private Mortgage Insurance. Piggyback Loans typically come in the form of home equity loans or home equity lines of credit, both of which use the home’s equity as collateral.
Piggyback Loans are combo loans that are a Second Mortgage on top of the primary mortgage to avoid paying PMI when the Down Payment is less than 20% of the purchase price. These Mortgage Loans are also used to keep the first loan below the conforming loan limit. Piggyback Loans can sometimes also be a wise option for homebuyers looking to finance a home without putting down a significant down payment. In this situation, they are taken out at the same time as the main Mortgage. A Piggyback Mortgage is an additional debt that can include any additional mortgage or loan beyond a borrower’s first mortgage loan, which is secured with the same collateral.
Most mortgage lenders prefer homebuyers to have at least 20% of the home’s value saved for the Down Payment. However, it’s not always possible to have that much in cash, especially if the home values are rapidly rising. Some programs allow homebuyers to put smaller amounts of money down such as FHA Mortgage Loans or VA Loans, but they come with certain requirements such as income, location, etc. The homeowners are required to pay some additional fees, making the Piggyback Loan a more attractive alternative. The risk of a Piggyback Loan includes greater interest payments and potential exposure in the event of unfavorable market conditions when selling a home.
What Is Piggyback Loan?
The Piggyback Mortgage Loans can serve several purposes. Some piggyback Mortgage loans are allowed to help a borrower with a down payment. Generally, most borrowers will only have the capacity to take on one or two Piggyback mortgages since all of the loans are secured with the same collateral. The Piggyback Loan can also be used to avoid having to pay for the Private Mortgage Insurance (PMI). In this case, the Second mortgage or Home equity loan is taken out at the same time as the first mortgage. The Piggyback Loan can also called the 80-10-10 loan, because if 80% of f the purchase price is covered by the first mortgage, 10% is covered by the second loan, and the final 10% is covered by the down payment. This will lower the Loan-to-Value (LTV) of the first mortgage to under 80%, eliminating the need for PMI. Some common types of Piggyback Mortgage Loans include home equity loans and home equity lines of credit (HELOCs).
How Does Piggyback Loan Work?
The Piggyback Mortgage Loans are a way to buy or refinance a home using two mortgages simultaneously. The first or the Primary Mortgage covers the bulk of the total borrowed amount, while the Second Mortgage finances a smaller portion. The Second Mortgage or Junior loan, is typically a home equity loan, or home equity line of credit (HELOC) that uses the the property as collateral. The homeowners sometimes use the Piggyback Mortgage Loans as a workaround for a 20% down payment. Typically, the homebuyers have to pay the Private Mortgage Insurance (PMI) if they put down less than 20% on a home purchase. When using Piggyback Mortgage Loans, the Second Mortgage fills in the remaining down payment account, allowing the borrower to avoid the extra fees.
What Are The Benefits of Piggyback Mortgage Loans?
The Piggyback Mortgage Loans helps the borrowers in three main ways:
- The Piggyback Mortgage Loans allow the homebuyers to purchase a home with a smaller down payment.
- Piggyback Mortgage Loans usually help the borrowers get a better interest rate on the higher balance loan.
- Piggyback Mortgage Loans generally help borrowers avoid Private Mortgage Insurance (PMI).
What Are the Types of Piggyback Mortgage Loans?
There are various types of Piggyback Mortgage Loans, some of which the homebuyers would like to have heard of before:
- Home Equity Loan: These Loans are lump sum loan that typically allows existing homebuyers to tap into the equity they have built up in their home. Equity is the amount of borrower’s home that they own outright, free and clear or any Mortgage Loan balance. In the case of Piggyback Mortgage Loans, the Home Equity Loan is made at the same time as the Mortgage Loan they are looking to purchase a Home. The home equity loan becomes a second mortgage, however, Piggyback Mortgage Loans onto the first one, and funds are used to cover a portion of a home purchase.
- Home Equity Line of Credit: HELOC functions in a similar way as the Home Equity Loan when used as a Piggyback Mortgage Loan. The HELOC would be opened at the same time as a Mortgage to Purchase a Home. The funds from the Home Equity Line of Credit would then be used to cover a portion of a home purchase.
- Down Payment Mortgage: These Mortgage Loans function somewhat similarly to the Piggyback Mortgage Loans. It is the Mortgage loan that is earmarked towards all or part of the homebuyer’s Down Payment, and it is gathered towards the home purchase. Typically this sort of loan comes from a formal Down Payment assistance program offered through a state housing finance authority.
How Piggyback Loans are Structured?
The Piggyback Loan is structured in the following:
- 80-10-10 piggyback loan: The first mortgage finances 80% of the Purchase Price, The Second Mortgage covers 10% and the homebuyers put down another 10%.
- 80-15-5 piggyback loan: The Primary Mortgage covers 80% of the purchase amount, the Second mortgage finances 15% and the Homebuyers put down 5%.
- 80/20 piggyback loan: In this structure, the first mortgage finances, 80% of the home price and the second mortgage covers 20%, meaning the homeowners finance the entire purchase without making a down payment.
What Are The Requirements to Get a Piggyback Loan?
The Piggyback Loan might help homebuyers get around some of the requirements of a Jumbo Loan, however, they are not necessarily easy to qualify for either. The fact that homebuyers are financing such a large percentage of home purchases can raise red flags with mortgage lenders. Expect to have their finances scrutinized to verify that the borrowers can indeed pay back both loans. The homebuyers need a strong credit score of about 700 or higher, though some lenders might offer them to people with scores as low as 680. It is wise to reduce the Debt-to-income Ratio (DTI) as much as possible before applying, too. The homebuyers should aim for a DTI of 36 percent or less, including the repayments of both loans. However, some Mortgage lenders might be willing to go a bit higher than that.
How To Get a Piggyback Loan?
The Piggyback Loan requires extra work when buying a home because the homebuyers are applying for and closing on two loans simultaneously. Here’s what to expect from the process:
- STEP I: The homebuyers may be able to finance both their first and second mortgages with the same lenders. Some lenders offer a discount for borrowing both loans with them, but the borrowers may find a better deal using the separate lenders. Homebuyers need to compare interest rates, APR, Fees, and Loan terms between multiple lenders to see which option meets their needs and provide them with the best deal.
- STEP II: The Minimum requirements will differ between the Primary Mortgage and Secondary Mortgage. The mortgage lenders typically require a credit score of 620 for the conventional mortgage loan, while the Piggyback Loan lenders may require a 660 or 680 score. The two loans may also have different Debt-to-income Ratio (DTI) thresholds and other unique requirements.
- STEP III: The homeowners have to apply for both loans simultaneously, but securing their first loan is a priority since the homeowners can’t get the Piggyback Loan without it. The homebuyers will follow the lender’s requirements for the application and underwriting process.
- STEP IV: When homebuyers end up financing both loans with two separate mortgage lenders, or the same one. They have to submit a Second mortgage application while securing their first mortgage. If the homebuyers are working with a single lender, the loan process will be somewhat streamlined since they already have the necessary information. If the homeowners are financing the Piggyback Mortgage with a separate bank or mortgage company, expect to provide both lenders with their personal and financial information.
- STEP V: After both loans get approved The homeowners will need to enter the underwriting phase and go to the home appraisal inspection and other steps. They will also need to ensure your down payment and closing costs funds are ready. Each lender may request some additional information or documents throughout the mortgage Loan process. The homebuyers have to respond promptly to each request to ensure a smooth closing on both loans.
Piggyback Loan Reviews
A Piggyback Mortgage Loan may help homeowners avoid monthly PMI Payments and reduce their Down Payment. However, that’s not to say a Piggyback Loan does not come with its own potentially negative costs. Here are some Pros and Cons of Piggyback Loans to be aware of before deciding on a mortgage type.
Pros:
- With Piggyback Loans, the homebuyers can avoid paying the Mortgage Insurance.
- Homebuyers can buy a high-priced home without taking out a Jumbo Loan.
- homeowners can build home equity faster than if they were paying for PMI.
- The Interest Paid on the Second Mortgage Loan may be tax-deductible.
- The Two Monthly Mortgage Payments might be cheaper than a Jumbo Loan Payment.
Cons:
- The Homeowners will pay a higher interest rate on the Second Mortgage.
- It can be harder to refinance or sell the Home with two loans.
- Qualifying for Piggyback Loans can be more challenging than the Primary Mortgage.
- The Borrower has two monthly mortgage payments.
- The total borrowing costs could be higher than taking out a single loan.
Frequently Asked Questions (FAQs)
Question 1: Is It hard to get the Piggyback Mortgage Loans?
Answer: A Piggyback Loan often has higher interest rates and loan payments than the standard Mortgage, and this can make it more difficult to qualify based on the homebuyer’s income. It also typically requires a higher credit score than a mortgage with an all-cash down payment.
Question 2: What credit score is needed for Piggyback Mortgage Loans?
Answer: The credit score requirements for the Piggyback Mortgage Loans vary by lenders. However, the borrowers need to reach out to the Loan officer to find out what credit score they might need to qualify for the primary mortgage and Piggyback Mortgage Loans for a home they want to purchase.
Question 3: Are Piggyback Mortgage Loans a Junior or Senior Loans?
Answer: Piggyback Mortgage Loans are the Junior Loans subordinate to the primary mortgage, which is the senior loan. The Junior Mortgage will often come with higher interest rates, be restricted to lower loan amounts, and may be subject to additional imitations.
Question 4: How can a Piggyback Loan be used to eliminate PMI?
Answer: Private Mortgage Insurance (PMI) is often needed by mortgage lenders in case the down payment on the mortgage loan will be less than 20%. A Piggyback Loan can be used to come up with down payment cash to eliminate this requirement in some cases.
The Final Verdict
A Piggyback Mortgage Loan is an additional debt beyond the first Mortgage Loan. There are varieties of different types from a down payment mortgage to a second mortgage to a home equity loan to a Home Equity Line of Credit (HELOC). These Mortgage Loans can also be used to avoid paying Private Mortgage Insurance (PMI) through things such as “80-10-10” Piggyback Mortgage Loans. A piggyback loan can allow homeowners to access homeownership when they might not otherwise be able to do so. It can be helpful if the homebuyers haven’t been able to squirrel away enough cash for a down payment or your desired home has a price tag above conforming loan limits.
