How Do 80-10-10 Loans Work?
Even if you don’t have a 20% down payment, you can avoid the cost of private mortgage insurance (PMI) with an 80-10-10 loan. You take out a primary mortgage for 80% of the purchase price and a second mortgage for another 10%, while making a 10% down payment. Knowing how 80-10-10 loans work can help you decide if they’re the right option for your homebuying needs.
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What is an 80-10-10 loan?
An 80-10-10 loan is a combination of two mortgages used to purchase a home with a 10% down payment. These loans are also known as piggyback mortgages or combination loans, and break down as follows:
- The first loan is a traditional mortgage that covers 80% of the home’s purchase price.
- The second loan covers 10% of the home’s price and is usually a home equity loan or home equity line of credit (HELOC) that effectively “piggybacks” on the first.
- The remaining 10% is paid with a cash down payment.
How 80-10-10 loans work
There are a few more moving parts when it comes to 80-10-10 loans, since you’re taking out two mortgages.
The first mortgage. Most borrowers choose a fixed-rate first mortgage to get the lowest monthly payment. You can choose an adjustable-rate mortgage (ARM) if you want a slightly lower initial rate for a set time, but the payment could become unaffordable when the loan rate starts adjusting later.
The second mortgage. You can choose a home equity loan or HELOC. A home equity loan is paid out in a lump sum and has a fixed interest rate and predictable monthly payments.
A HELOC is like a credit card secured by your home — you can withdraw money for a set time called a “draw period,” and pay it in full. HELOC rates are usually variable, and in some cases you can even make interest-only payments during the draw period. Once that period ends, the balance must be paid off in monthly installments.
The down payment. You’ll need to document the money you have for your down payment just like you would for a regular mortgage. Lenders may allow you to get a down payment gift, as long as the donor provides a gift letter and documents where the funds came from.
Why you don’t pay PMI with an 80-10-10 loan
If you make less than a 20% down payment on a conventional loan, the cost of private mortgage insurance (PMI) is typically added to your monthly payment. PMI protects your lender if you can’t make payments and default on your mortgage.
With an 80-10-10 loan, you’re still making a 20% down payment. Instead of using all cash, though, you finance 10% with a second mortgage and the first mortgage lender doesn’t have to charge you for PMI.
4 reasons to get an 80-10-10 loan
There are several ways 80-10-10 loans can help with your home buying plans.
- YOU CAN AVOID PAYING PMI. As detailed above, you don’t pay PMI with an 80-10-10 loan, which can cost you about $30 to $70 for every $100,000 you borrow.
- YOU COULD SKIP A JUMBO LOAN. If you’re buying a home that requires a loan amount above the conforming loan limit in most parts of the country, you’ll need a jumbo loan — this loan type often requires a higher credit score and down payment than a standard conventional mortgage. An 80-10-10 loan may keep your first mortgage below the conforming loan cutoff, so you don’t have to jump through jumbo loan qualifying hoops.
- YOU CAN BRIDGE A PENDING HOME SALE CASH GAP. An 80-10-10 loan can help you temporarily cover the down payment on a new home if you’re still trying to sell your current home. Even better: You can use the profits from your home sale to pay off the second mortgage without refinancing.
- YOU’LL HAVE MORE SHORT TERM CASH. An 80-10-10 loan leaves more cash in the bank, which may be worth it if your emergency fund is running low, or you know you’ll need to spend some extra money to fix up the home. If you’re expecting a large bonus or commission soon after your home is purchased, you could clear out the 10% second mortgage with the extra money, leaving you with just one mortgage.
Pros and cons of an 80-10-10 mortgage
| Pros | Cons |
|---|---|
You don’t pay for private mortgage insurance | You’ll have two monthly mortgage payments |
You may avoid a jumbo mortgage | You’ll pay higher rates for second mortgage options |
You can pay off the second mortgage, leaving you with only one mortgage payment | You may pay a variable rate if you choose a HELOC |
You’ll leave more money in your bank account | You’ll pay closing costs on two mortgages |
You can deduct the mortgage interest on both loans | You’ll pay a higher rate on the primary mortgage |
How do you qualify for an 80-10-10 mortgage?
Lenders of 80-10-10 loans scrutinize your finances just like traditional mortgage lenders, except you have to verify you have satisfactory income, credit and assets to get approved for both loans. Qualifying for two mortgages is complicated, since each loan will have its own set of approval guidelines. With an 80-10-10 loan you’ll need:
A higher credit score for the second mortgage. While you’ll only need a 620 score to qualify for a conventional first mortgage, some home equity lenders require a 660 or 680 minimum score. If you can’t meet the requirements for both loans, an 80-10-10 loan won’t make sense.
A lower DTI ratio maximum. Second mortgage lenders generally don’t want your total debt to equal more than 43% of your gross income, compared to the 50% debt-to-income (DTI) ratio maximum that conventional first mortgage lenders allow.
Two sets of closing costs. You may need to document a little extra cash to get an 80-10-10 loan if you apply for the first and second mortgage through different mortgage companies; this will show you can cover the closing costs charged by each company. Lenders that specialize in 80-10-10 loans may offer lower cost options if they handle the approvals for both mortgages.
How to get a second mortgage
Not all lenders offer 80-10-10 mortgages. There are usually two ways to get a second mortgage as part of an 80-10-10 loan structure.
Find a lender that offers both mortgages. Lenders that specialize in purchase loans often offer 80-10-10 loan programs with both loans approved together. You should still comparison shop — different lenders have different partnerships with second mortgage lenders, and may even offer you a discount toward costs for their 80-10-10 loan.
Pick two different lenders. You can shop for your first and second mortgage separately by using a rate shopping tool or by contacting three to five lenders and comparing their loan estimates. Be sure to let the first mortgage lender know you’re taking out an 80-10-10 loan — lenders are required to pay an extra fee if you take out two mortgages together, which is typically passed on to you as a higher interest rate on the first mortgage.
You may pay higher 80-10-10 rates in 2023
The fee for piggyback financing increased in May 2023, which means you may pay an even higher rate on your primary mortgage than before the changes took effect. You’ll also pay a higher interest rate for conventional loans in general: The benchmark for the best rates has been raised to 780, which is 40 points higher than the previous 740 benchmark. If your score is between 740 and 779, rates will be slightly more expensive.
80-10-10 loans vs. traditional mortgages
The easiest way to see how an 80-10-10 loan works versus a traditional mortgage is to compare them side by side. The table below shows how the numbers roll out if you’re buying a $475,000 home with a traditional 30-year mortgage and 10% down; an 80-10-10 loan with a 15-year fixed-rate home equity loan; and an 80-10-10 loan with an interest-only HELOC payment.
| Loan details | Traditional mortgage with 10% down | 80-10-10 with home equity loan | 80-10-10 with HELOC |
|---|---|---|---|
| First mortgage loan amount | $427,500 | $380,000 | $380,000 |
| Down payment | $47,500 | $47,500 | $47,500 |
| First mortgage interest rate | 6.35% | 6.5% | 6.5% |
| First mortgage monthly principal and interest payment* | $2,660.06 | $2,401.86 | $2,401.86 |
| Second mortgage interest rate | N/A | 7.39% | 6.74%** |
| Second mortgage payment | N/A | $437 | $266.79 |
| Monthly mortgage insurance payment | $222.66 | N/A | N/A |
| Total monthly payment | $2,882.72 | $2,838.86 | $2,668.65 |
*Excludes property taxes and homeowners insurance.
**Teaser rate for six months, interest-only payment.
Alternatives to an 80-10-10 loan
If you can’t qualify for an 80-10-10 loan and don’t have the cash for a 20% down payment, you can try these low-down-payment options:
FHA loans. The Federal Housing Administration (FHA) insures loans to buyers with scores as low as 580 and a 3.5% down payment, and 500 with a 10% down payment. However, you’ll have to pay expensive FHA mortgage insurance, which will last for as long as you have the loan, if you make the minimum down payment.
VA loans. Eligible military borrowers may qualify for a no-down-payment loan backed by the U.S. Department of Veterans Affairs (VA). No mortgage insurance is required.
DPA loans. Local, state and national down payment assistance funds may be available in your area to give you extra help with upfront money to buy a home. In some cases, you may be able to combine your down payment with a DPA loan to avoid or reduce the amount of mortgage insurance you pay.
If all else fails, you can buy a cheaper home, or wait until you’ve stockpiled a bigger down payment to ultimately purchase your home.