If you are planning to buy a high-priced home (say at or under $2 Million), but do not have 20% down payment and still want to avoid super-expensive mortgage insurance (PMI), we have just the right loan program for you.
How does an 80/10/10 loan work?
Usually, a 2nd mortgage or a Home Equity Line of Credit (HELOC) is offered up to 90% of the home value. Such kind of loans are popularly known as 80/10/10 loans, where the first mortgage is 80 percent of the home value, second mortgage or HELOC is 10 percent and the rest 10 percent is the down payment by the borrower.
What are the benefits of an 80/10/10 loan?
PMI is required on all conventional loans with less than 20% downpayment. So if you had 10% downpayment and you opted for one loan of 90%, you would end up paying PMI. However, an 80/10/10 loan eliminates the need for a mortgage insurance. In some cases, this could mean a higher interest rate on the 1st mortgage. Hence, 80/10/10 loan is not for everyone. Depending on your credit qualification and financial goals, in some cases doing one 90% LTV loan and paying PMI may be a better idea. Make sure to contact us for a free consultation so that we can guide you which option is better for you.
Lets Look At Some Examples
Example #1 – Using 80/10/10 loan to avoid PMI
Say you are buying a house worth $650,000 and you only have 10% downpayment i.e. $65,000. You need a loan amount of $585,000. You can get one loan of 90% and pay mortgage insurance on it. Or you can get two loans – 1st mortgage for 80% i.e. $520,000 and a 2nd mortgage (HELOC) for 10% i.e. $65,000. You don’t pay mortgage insurance on either the 1st or the 2nd mortgage.
Example #2 – Using 80/10/10 loan to qualify for a higher loan amount
Say you wanted to buy an $825,000 house and had only 10% downpayment. You won’t qualify for any loan since Jumbo loans (loan amounts higher than conforming limits) require a minimum of 20% downpayment. So if your property is in a high-cost area and conforming limit is $679,650 (for 2018) – with a 10% down your maximum loan amount can’t exceed $679,650. But with an 80/10/10 loan, you can buy an $825,000 house by putting down only 10%.
Example #3 – Using 80/10/10 loan to avoid stricter jumbo mortgage guidelines
Say you are buying a $900,000 house and have 20% downpayment. You can get one loan of $720,000. But you don’t want to exceed the conforming limit and avoid getting a Jumbo loan. In this example, you can get a $679,650 loan on the 1st (assuming that is the loan limit in your county) and can get a HELOC (2nd mortgage) for the balance. You are still paying 20% down, so technically it is not an 80/10/10 loan. But using a HELOC on the 2nd and splitting the loan into two, you can avoid stricter guidelines that are often associated with a Jumbo Loan.
How can I qualify for an 80/10/10 loan?
We offer this loan program for both home purchase and refinance. The property must be owner-occupied. A minimum credit score of 700 is required for a total loan (1st + 2nd) of $750,000.
We offer loan amount of up to $1.7M (purchase price of $1.89M) with 10% down payment.
You can also get a 15% down payment loan (80% 1st mortgage + 5% 2nd mortgage) up to $2 million purchase price. These Jumbo programs require a minimum 730 score and 6 months -18 months of reserves (depending on the loan amount and credit score).
The first mortgage has several loan programs to choose from – 7/1 ARM, 10/1 ARM or a 30 Year Fixed. Even an Interest Only option is available.
The second mortgage is always a variable rate line of credit.
*Not all of the programs mentioned in this post are available in all the states. There are additional underwriting guidelines for which you need to qualify.*