What Is an 80-10-10 Loan?

Even though this type of loan has been around for a while, it’s still considered relatively unknown as many people have never heard of it. So, what exactly is an 80-10-10 loan?   

In short, 80-10-10 is a mortgage that allows you to finance 80% of the home’s value with a first loan, 10% with a second loan, and put 10% down as a down payment. So, with this mortgage, you are essentially taking out two loans and combining them to buy a house.  

Another name for this is a piggyback loan and in general is considered to be a great way to avoid paying private mortgage insurance (PMI), which can add up over time. PMI is required when a borrower puts less than 20% down on a home. It protects the lender in case of default and typically costs around 0.5%-1% of the loan amount annually.  

While an 80-10-10 mortgage loan avoids the need for PMI, it does come with some drawbacks. The biggest downside is that you’re essentially taking out two loans, which means two sets of closing costs, two monthly payments, and two sets of interest charges over the life of the loan. Additionally, if you eventually want to refinance your home, you may need to pay off at least one of the loans in full before doing so.  

In this article, we will take an in-depth look into the 80-10-10 loan program so you will truly understand how the process works and decide if you should go through it.  

How Do 80-10-10 Loans Work?

A piggyback mortgage is a type of loan in which a homebuyer receives two separate loans, one for 80% of the home’s value and one for 10%, and all that’s left is to put the remaining 10% as a down payment. The two loans work together to cover the entire purchase price of the home.  

Since the borrower is putting down 10% in cash, they will have equity built up immediately. This equity is important because the first mortgage is traditional, but the second one is essentially a home equity loan or HELOC loan, and it’s piggybacking on your mortgage.  

It all sounds fairly simple, but there are a few key things to keep in mind. First, the interest rates on 80-10-10 loans are not the same. On the second loan (which is there to finance 10% of your purchase) you will have a higher interest rate on the first loan (that is taken out to finance the 80%). This is because the second loan is a piggyback loan and lenders view it as riskier than the first one. Secondly, both loans will have their own terms and conditions, which means that the borrower will be responsible for making two separate monthly payments.  

Lastly, it’s important to note that 80-10-10 loans are not available from all lenders. Some lenders may only offer 80-15-5 loans (where the borrower takes out one loan for 80% of the home’s value, a second loan for 15%, and puts down 5% in cash) or 80-20 loans, so you should look into these options as well to see if they fit you and your budget better.  

How to Qualify for 80-10-10 Piggyback Loans

Qualifying for any mortgage can be challenging, and with this one, you essentially need to qualify for two. Keep in mind that they do not have the same requirements, so there will be a lot for you to fulfill.   

In order to qualify for an 80-10-10 loan, you’ll need to have good credit and enough income to support the additional monthly payment. While you’ll only need a 620 score to qualify for a conventional first mortgage, some home equity lenders seek a 660 or 680 minimum score as an 80-10-10 loan requirement.   

Another one is a lower DTI ratio maximum. While with a first mortgage your ratio can be up to 50%, for the second one, you will likely need to lower it to about 40%.  

If you are able to meet these 80-10-10 loan requirements and your credit score is in a good shape, the next step is finding a good lender. You will either need to find a lender that offers both or pick two different ones.  

Next, submit your financial information, including your income, debts, and assets, and the lender will then review your application and determine whether or not you qualify for the loan. If you’re approved, you’ll then need to sign a promissory note outlining the terms of the loan. Once that’s done, the lender will provide you with the funds.  

80-10-10 Loans: Pros and Cons

Piggyback loans can be a good option for borrowers who don’t have enough cash on hand for a traditional 20% down payment. They can also help you avoid paying private mortgage insurance (PMI), which is required if you put less than 20% down on a conventional loan.  

However, they do come with some risks as well. For one, you’ll be taking on two separate monthly payments, which could be a challenge if your budget is tight. Additionally, if your home value decreases or you encounter other financial difficulties, you could end up owing more than your home is worth – meaning you’d have to bring money to the table in order to sell it.  

Before deciding whether a piggyback loan is right for you, be sure to carefully weigh the pros and cons we are going to lay down for you.  

Pros  

• You will avoid private mortgage insurance (PMI). This can add several hundred dollars to your monthly mortgage payment so avoiding it will save you quite a bit.  
• Can help you qualify for a larger loan amount. This can be helpful if you are trying to buy a more expensive home.  
• Can help reduce your interest rate. If you take out two loans – one for 80% of the purchase price and one for 10% – then your interest rate may be lower than if you had taken out a single loan for the entire 90%. This is because lenders view borrowers with smaller loan amounts as being less risky.  
• You can pay a second mortgage early leaving you with only one.  

Cons  

• These second loans typically come with higher interest rates than first mortgages.   
• You’ll have two monthly mortgage payments to make.  
• If you eventually want to refinance your loan, you may only be able to do so if you pay off the piggyback loan in full first.  
• If you default on your piggyback loan, the lender could foreclose on your home, even if you’re current on your first mortgage.  
• You’ll need to pay closing costs on two mortgages. 

When Does an 80-10-10 Loan Make Sense?

This type of financing can be a good option if you don’t have the cash for a large down payment but want to avoid a huge payment toward PMI.  

It would make sense to get this loan if you have at least 10% for a down payment and don’t want to wait to buy a house when you save up more. This loan is also a good option if you’re buying an expensive home. Large mortgages often require piggyback loans because they exceed the maximum amount that can be financed with a single loan.  

They are also useful if you are trying to sell your home and move into a different one but can’t afford a down payment of 20% as your original house isn’t sold yet. 

Alternatives to 80-10-10 Loans

There are a few alternatives to 80-10-10 loans. We already talked about other variations like 80-15-5 or 80-20. However, here are some other options to consider:  

• FHA loans. These government-backed up loans can be qualified for even if your credit score is as low as 580. Additionally, they only require a 3.5% down payment. However, they do come with expensive FHA mortgage insurance, which can last as long as the whole loan.  

• Bridge loans. This is a great option if you already own a home but are looking into moving into another one. This short-term home loan will help you bridge the gap between when you buy your new home and when you sell your current one. Although you will need a 20% down payment.  

• VA loans. Military borrowers who are eligible may qualify for this no-down-payment loan backed by the U.S. Department of Veterans Affairs This loan also requires no insurance.  

These are just some of the available options, but before you actually decide we suggest you look into 80-10-10 loan rates and compare them to other loan offers to find the one that fits your budget best.  

Final Thoughts

Piggyback loans can be a great way to finance a home purchase, especially if you don’t have the amount of down payment typically required by lenders.   

However, like with any commitment of this kind, it is crucial for you to take time to understand what these loans are and how they work before signing on the dotted line. In case this loan type is a good fit for you, make sure you shop around for the best terms. Lastly, remember to factor in the costs of both loans when budgeting for your new home.