80-10-10 Loans: What It Is, And How They Work

Written by Elijah BishopUpdated: 15th Mar 2022
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Across the United States, homebuyers are intimidated by the prospect of saving enough for a 20% down payment that they forego it entirely and end up paying private mortgage insurance (PMI). If you’re bent on getting a mortgage but don’t have 20% down, you might want to think about a piggyback loan.

A piggyback loan is essentially a second mortgage on your house that lets you avoid PMI by financing a portion of your down payment. In this article, we’ll cover all you need to know about piggyback loans. 

What Is an 80-10-10 Mortgage? 

The 80/10/10 mortgage is a pair of loans that homebuyers can use to complete home purchases without a 20% down payment. A potential borrower can use the first loan to cover 80% of the property’s cost, then use another loan to cover the remaining 10%, leaving the borrower with a 10% down payment. 

The second loan, also known as a piggyback loan, can be used to reduce initial mortgage payments such as private mortgage insurance (PMI) and, of course, the down payment.

>> More: Best Mortgage Lenders

How Does an 80-10-10 Mortgage Work? 

A piggyback loan combines two mortgage loansinto one. The first loan is a mortgage for most of the money you borrowed, and the second is a mortgage for the balance. The loan is called a piggyback mortgage because the second mortgage is “piggybacked” on the first, resulting in a loan size for the total amount you want to borrow.

Piggyback loans are normally available up to 90 percent loan–to–value (LTV) on the purchase price. They usually consist of three parts:

  • A first mortgage covering 80% of the purchase price
  • A second “piggyback” mortgage worth 10% of the purchase price
  • Your down payment will cover the remaining 10% of the home’s cost.

An 80/10/10 structure is the name for this type of structure. The 80 percent of piggyback loans is often a 30-year fixed-rate mortgage, with the remaining 10% being a home equity line of credit (HELOC).

80-10-10 Loan Example 

Let’s imagine you want to buy a $550,000 house but only have $55,000 for a down payment. To fund the remaining $544,500, you’ll need to locate financing. So, you’ve got a couple of choices:

  • You can receive a 90 percent loan and pay mortgage insurancesimultaneously.
  • You can also get a piggyback loan with an 80 percent first mortgage ($435,600) and a 10% second piggyback mortgage ($54,450). You will not have to pay PMI in this case.

How to Get a Piggyback Loan 

When you apply for an 80/10/10 piggyback loan, you’re applying for two mortgages at once: the “first-lien,” which is typically worth 80% of the home’s value, and the “second lien,” which is typically worth 10%.

Some lenders provide piggyback loans, which allow you to receive both mortgages in one place. Borrowers are more likely to receive their first mortgage from one lender and their second mortgage – usually a home equity line of credit – from a different lender.

Fortunately, you won’t have to look for a second mortgage on your own. Most borrowers who seek an 80/10/10 loan notify their preferred lender.

That lender can then propose a company for the second mortgage they previously worked with. Your “first mortgage” lender can then help shepherd both applications through at the same time, making the process much more efficient.

Piggyback Loan Pros and Cons 

Pros:

  • Allow conforming borrowers to avoid mortgage insurance altogether.
  • Jumbo loans, which have tougher criteria, can be avoided by borrowers.
  • By supplementing the down payment with a second mortgage, jumbo borrowers can acquire a better mortgage rate.

Cons:

  • Instead of one loan, the borrower must qualify for, apply for, and close on two.
  • It may be difficult to refinance the primary mortgage later since it requires the agreement of the second-mortgage lender.
  • When making the minimum, interest-only payments on a HELOC during the initial draw term, homeowners grow equity more slowly (usually ten years).
  • HELOC interest rates are variable, which means they can rise.

Who Qualifies for an 80-10-10 Mortgage? 

Because you’re qualifying for two loans instead of one, an 80-10-10 mortgage is more difficult to qualify for than a typical mortgage. Your credit score is one of the most crucial elements. For a conventional loan, a credit score of 620 is required.

The credit score required for a second mortgage varies depending on the type of home equity loan:

  • Borrowers must have a credit score of at least 620 to qualify for a home equity loan; however, some lenders require a credit score of 660 or 680. Borrowers need a credit score of at least 740 to get the best rates.
  • According to Equifax’s Quarterly U.S. Consumer Credit Trends report, nearly half of all HELOCs generated in 2021 were given to borrowers with credit scores of 780 or higher. Borrowers with credit ratings of 740 or above received almost 60% of the loans.

Your debt-to-income (DTI) ratio, which is equal to your total monthly debt payments divided by your gross monthly income, will be considered by lenders for both loans. Lenders prefer a debt-to-income ratio of less than 43%. Some lenders, however, may be willing to work with a higher DTI if you can demonstrate your ability to repay the loan.

Your income and employment will be taken into account by lenders. Most lenders want to see steady employment history for the last two years. You might need to supply additional documentation if you’re self-employed or have a seasonal or fluctuating income.

Are 80-10-10 Mortgages Worth It? 

A piggyback loan is an excellent option for the right property buyer. For example, if you want to avoid paying private mortgage insurance, if you’re purchasing a new house before selling your old one, if you don’t want a jumbo loan, or if you’re buying a condo, a piggyback loan might be right for you. 

A piggyback loan, on the other hand, has some drawbacks. For example, if making a 10% down payment would deplete your bank account, it might not be a good idea. The second loan, which is frequently a home equity line of credit, will normally have higher interest rates than the first.

Alternatives to an 80-10-10 Loan 

Before several low-down-payment mortgage options became widely available, piggyback loans were widespread. If you’re worried about saving up for that 20% down payment, there are a variety of first-time homebuyer loans and grants that can help you get into a home with less money upfront and without the hassle of a piggyback loan:

  • FHA loan – An FHA loan, which the Federal Housing Administration backs, allows you to buy a home with as little as 3.5 percent down. Even if you have bad credit, you can get this loan. For the 3.5 percent down payment, the program requires a credit score of at least 580. You’ll require a 10% down payment if your credit score is between 500 and 579.
  • Conventional 97 – Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSE), assist in the availability of mortgages with as low as a 3% down payment.
  • VA Loans – If you’ve served or are currently serving in the military, you may be qualified for a loan backed by the United States Department of Veterans Affairs (VA Loan), and you won’t have to put any money down.

You might also decide to buy a cheaper house since waiting to save for a larger down payment may not be the best idea due to the rising prices of homes. 

>> More: Understand Government Home Loans

Bottom Line: 80-10-10 Loans 

There is no such thing as a one-size-fits-all solution for mortgages. When determining whether or not an 80/10/10 loan is right for you, consider your budget, financial discipline, and the real risk of your selection. For some, a piggyback loan is a great option, and for others, it is not ideal.

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.