There are many mortgage loan choices available to home buyers in today’s market. For many, putting 20% down on a house is not a viable option, so many home buyers have to look for mortgage programs that require less than 20% down. These mortgage programs will require private mortgage insurance also known as PMI. The mortgage insurance increases the monthly mortgage payment, but for a few people, there is another option as well.
Many people will consider adding a second home loan. These loans are also called piggy back seconds or purchase money seconds. The advantage of a second home loan is a reduced down payment, no mortgage insurance, and in most cases a reduced total monthly mortgage payment.
Reduced Down Payment
By adding a second mortgage loan, you are able to have a lower down payment and still avoid mortgage insurance. In order to avoid mortgage insurance, a purchaser must put down 20%, but with a second mortgage loan, you are actually in a sense financing a portion of the down payment. Second home loans usually help the client put as little as 5-10% down on a new house.
This is where the term 80/15/5 or 80/10/10 comes into consideration. The numbers represent the loan-to-value ratio compared to the purchase price of the home. The first number is the first mortgage which is usually 80% of the sales price. The second number is the second mortgage and the final number represents the down payment. For example, if a buyer purchases a house for $200,000 and does an 80/10/10 loan program, then the first mortgage would be for $160,000, the second loan would be for $20,000 and the down payment would be $20,000.
No Mortgage Insurance
By splitting the mortgage loans into two, mortgage insurance is avoided. This can save the person hundreds of dollars a year.
Lower Monthly Loan Payment
For the most part, the monthly mortgage payment is lower when you split the loans into two separate mortgages. Keep in mind though, that the second loan will have a higher rate.
Getting Approved For A Second Or Piggy Back Mortgage
In order to split the loans, you must get qualified for a second mortgage loan. Second lien companies have tougher mortgage guidelines and usually require a credit score of at least 700. Also, the maximum debt-to-income ratio for the purchase cannot exceed 45%.
Finally, several second lien lenders will not do a second loan for a first time home buyer. Also, some loan programs, like FHA home loans, do not allow a second lien at time of purchase.
Not everyone will have the ability to split their home loans at time of purchase, so it is important to discuss with your mortgage consultant all your options when it comes to purchasing a new house.
David White is a Sr. Mortgage Consultant who specializes in home loans. David has over 12 years experience helping his clients with Dallas home loans.
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