The 80/20 home mortgage financing program allows a borrower to purchase a home with little money out of pocke. This program is particularly attractive to first-time home buyers because they do not need mortgage insurance and may be eligible for additional tax advantages.
· No cash reserves required for combined loan amounts as high as
$1.5 Million
· Decision credit scores as low as 580 (Primary wage earner decision
credit scores can be used)
· Available for Primary Residence SFR, PUD, low-rise condo, high-rise
condo, and 2-unit property types
· Available on Purchase, Refinance, and Cash Out Refinance transactions
· Gift funds and property seller concessions of up to 6% allowed for
purchase transactions
· Limited/Stated Doc combined loan amounts up to $625,000 with up to
100% cash out
Additional Features
· Up to 50% DTI
· Interest Only options available on the 80% 1st loan
· No private mortgage insurance - PMI
· Full and Limited Doc loans allow up to 6 "rolling lates"
No money down without PMI
By Holden Lewis • Bankrate.com
As home prices continue to climb, borrowers increasingly turn to 100-percent financing, and especially home loans that sidestep the need for mortgage insurance.
One such loan is known as the 80/20 mortgage. The home buyer takes out two loans -- the first for 80 percent of the purchase price, and the second for 20 percent of the home's price. The borrower is expected to come up with the closing costs.
"It allows people to buy without a down payment, or for those people who would prefer not to touch their savings to get into a house," says Anthony Hsieh.
"What we're seeing is a lot of young professionals," he adds. "People who have gotten out of college and have good jobs. They have good credit, but they haven't had the opportunity to accumulate a lot of savings."
Getting off the rent treadmill
These mortgages are targeted at people who feel stuck on the rent treadmill.
They can afford monthly rent that costs roughly the same as a house payment,
but after they pay their monthly bills, they can't save much money toward
that down payment. Many of these people watch home prices rising faster
than their incomes and feel that they're falling further behind with each
month that they rent.
Plenty of mortgage programs allow borrowers to buy houses with little or no money down, but they usually require private mortgage insurance, or PMI. Mortgage insurance protects the lender from the costs of foreclosing on a house when the borrower falls too far behind on the loan payments. The lender benefits, but the borrower pays. Generally, mortgage insurance is required when the loan amount is for more than 80 percent of the home's price.
The way to avoid paying mortgage insurance is by getting a "piggyback loan" -- a second mortgage to back up the first mortgage. The first and main mortgage is for 80 percent of the home's price. The piggyback loan is for 20 percent of the home's price, minus the down payment, if any. If you see mention of an 80-15-5 loan, it means that the borrower got a main mortgage of 80 percent of a home's purchase price, a piggyback loan for 15 percent, and made a 5-percent down payment. Myriad combinations, such as 80-10-10, are possible. The 80/20 uses a piggyback loan without a down payment.
Second loan, higher rate
Except in unusual cases, the interest rate on the piggyback loan is higher
than the rate on the first mortgage. But the combined payment usually costs
less than a loan of greater than 80 percent of the home's value, plus mortgage
insurance. This is especially true if the homeowner itemizes deductions
on federal income tax, because mortgage interest is deductible but mortgage
insurance is not.
"It pretty much comes out to a straightforward mathematical evaluation," says Bob Walters, senior vice president of Quicken Loans. You merely compare the cost of an 80/20 piggyback loan with a loan that includes mortgage insurance. The piggyback loan usually costs less each month.
Lenders structure 80/20 loans in many ways. At Hsieh's HomeLoanCenter, the first mortgage generally is a 5/1 ARM -- a loan with a fixed rate for the first five years, and which adjusts annually after that. The piggyback loan is a home equity line of credit that changes with the prime rate. These loans, Hsieh says, are designed to be refinanced in three to five years.
With Countrywide Home Loans, the 20-percent piggyback is always an equity line of credit pegged to the prime rate, and the 80 percent first mortgage can be a fixed-rate, adjustable-rate or interest-only loan.
The 80/20 loans have their pros and cons, says Vijay Lala, vice president of product development at Countrywide. "The pros are that you can get into a home with almost no money down," he says. "You just have to have your closing costs, and you can get your payment as low as possible with the interest-only feature."
The main drawback is a biggie. If the house loses value -- a possibility in overheated markets where these loans might be especially tempting -- the owner ends up owing more than the house is worth. That becomes a problem if the owner needs to sell the house or wants to refinance the loan. In such a case, the owner has to come up with cash to repay the loan in full.
An 80/20 loan isn't just for the cash-strapped borrower. Some home buyers have ample down-payment money, but the money is invested and they don't want to liquidate it.
"For relatively wealthy people, it's a cheap way of borrowing money at these low interest rates," says Diane Saatchi, who deals with plenty of wealthy clients as president of Dayton-Halstead Real Estate in East Hampton, N.Y.
If you are interested in a 80/20 mortgage loan, please contact us today. We also have an 80/20 mortgage calculator, so you can calculate your monthly mortgage payments.
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