You’ll get to know the term “80-10-10 loan” when you deal with a mortgage broker or start shopping for a home. This loan is also popular as a piggyback loan and made by combining more than one loans. 80-10-10 loan is customized to help its consumers so that they can save bigger.
In a 80-10-10 loan, as a new homebuyer, you can take out both 1st and 2nd mortgage simultaneously on the home. You may put down 10% of the purchase price as the 3rd installment or downpayment. The first loan is normally for 80% of the purchase value and the second loan will be other 10%.
Now let’s see how this loan works for you.
How do a 80-10-10 loan/piggyback mortgage work
A piggyback loan consists of a large loan (80%) and small loan (10%) that supports the other. As mentioned earlier the bigger loan makes it up 80% of the home’s buying value, and the smaller one with 10% value “piggybacks” off the first one. The homebuyer arrange only the 10% down payment.
For example - If you are going to buy a home worth of $500,000 with an 80-10-10 loan ; the first mortgage will be (80%) $400,000 and the second loan will be (10%) $50,000. You will be needing only a (10%) down payment of $50,000 to make this loan work.
What are the requirements of an 80-10-10 Loan/piggyback mortgage
To be qualified for an 80-10-10 loan, you might need to fulfil the below given requirements. The criterias are quite similar with a conventional mortgage loan.
1. Good credit score
As per credit scoring agency Experian, 800 – 850 credit score is outstanding, 740 - 799 is a very good, and 670 - 739 score is considered a good score. The fact is you’ll get the best deal on an 80-10-10 loan if your credit score is more than 700.
2. DTI
DTI or Debt-to-Income Ratio indicates how much debt you are currently maintaining with your income. It also signifies your loan affordability; that means how much it is safer for the lender to approve you a loan. Most lenders ignore loan applications where DTI is more than 36%.
3. A long and strong financial history
In an 80-10-10 loan, the lender will expect a good credit history from the borrower and a strong source of income. So, they will examine each and every documents you need, like 3 or 6 months pay stubs and your bank statement photocopies.
4. Down payment amount
In an 80-10-10 loan, the buyer needs to submit a 10% down payment. So, if you want to qualify for this loan, you must save 10% of the purchase price as a initial down payment.
If you somehow meet these above-mentioned criteria, you must think is it really worth to take out this loan? Check out the advantages and disadvantages to make your decision.
How much a 80-10-10 loan/piggyback mortgage is helpful?
a. Advantages:
1. It helps to buy a bigger home with these joint mortgages. You can be approved for 2 loans and by combining them, you can broaden your home search.
2. Monthly payments will be lower than conventional mortgages. Similarly you may get rid of private mortgage insurance, too.
3. You’ll get up to $100,000 tax exemption from the interest on the second mortgage or a home equity loan.
4. The amount of down payment is much lower than conventional loans. You can still avoid PMI even if you pay 10% or 5% down.
b. Disadvantages:
1. You must have a very good credit score before opting a 80-10-10 loan/piggyback loan. If you have a low score, you might have to face conventional loans with PMI.
2. On the second mortgage the interest rate is quite high. You may find such scenario where you can save a good amount on monthly payments if you choose to accept PMI instead of opting two loans.
3. A piggyback loan or 80-10-10 loan is very costly rather than a conventional mortgage. It is because you have to pay closing costs and fees on two loans instead of one.
4. You may not receive full tax benefits on a 80-10-10 loan interests in some cases. The interest on 2nd mortgage is tax deductible if the loan amount is valued under $100,000. So if your second mortgage (80-10-10) is valued more than that amount, you may not grab the full tax exemption.
5. PMI itself is tax-deductible. If you fall within the income criteria set by the IRS, you can deduct PMI payments on your taxes.
Now you may have a clear idea how a 80-10-10 loan works and its pros and cons. But here, a simple query must come to your mind - What is best for me? A 80-10-10 loan or opting a conventional mortgage with PMI?
How does a 80-10-10 loan/piggyback mortgage help borrowers to avoid private mortgage insurance?
If you opt for an 80-10-10 loan/piggyback mortgage, it can help you to avoid paying PMI.
If you buy a home with a conventional mortgage and your down payment is less than 20% of the home value, the lender may ask you to purchase PMI. If your first mortgage covers the entire home value but you are willing to pay more than 20% down payment, you can directly avoid PMI.
But what if you don’t have that much fund in your hand at the time of applying for a mortgage? Here a 80-10-10 loan can help you. In some cases, 80-10-10 loan or piggyback loan may allow you to qualify for the loan with 5% down payment (it will be known as 80-15-5 loan).
Now the question is “would you buy a PMI or a 80-10-10 loan?
It is up to you. You must make the decision by considering your personal financial situation.
Normally, taking out a 80-10-10 loan can make your monthly payments lower than what you might pay in a conventional mortgage with PMI.
PMI can be helpful if you think, in the future, your home value will increase sooner than you are ready to pay off the second mortgage.
If your home equity share increases to a decent level and can cover that extra 10% you need to borrow, you can cancel PMI.
However, in the current real estate market, we can’t expect that much increase in home values. So, it will be wise to obtain a second mortgage with an 80-10-10 loan/piggyback mortgage, save more, and pay of the loan as soon as possible.