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Piggyback loans are a type of credit taken by a borrower from the lender. The borrower uses this loan to pay the original loan from the lender. Piggybacking is not an excellent option to get approved for loans as it introduces additional liabilities. However, it has its benefits and suits various requirements. Read on to find out about the best Piggyback Loan Lenders.
What are Piggyback Mortgage Loans?
A piggyback loan is usually a second loan taken out after the initial mortgage, and the borrower uses it to fund the purchase of a single property. This type of loan helps to minimize initial mortgage fees like private mortgage insurance or deposit, which many providers want on your first mortgage.
According to most lenders, you should have a minimum of 20% of the property’s value saved up for a deposit. This amount of cash (without jeopardizing your retirement funds) is often not attainable, especially in an environment where home values are continually increasing.
The Federal Housing Administration (FHA) and Veteran Affairs (VA) provide loan programs that allow borrowers to cast aside a smaller amount. Still, they arrive with specific restrictions (earnings, geography, among others) that you should meet to be eligible. Furthermore, you may be obliged to pay additional costs, making a piggy mortgage more appealing.
Types of Piggyback Loans
There are numerous piggy loan programs available, as shown below. There was an 80/20 system (in which one could take 80 percent of the amount borrowed as an initial mortgage and 20 percent as the second mortgage, allowing you to obtain the entire amount), but sadly, the 80/20 plan no longer applies.
80/10/10 Piggyback loan: It is the most popular type of piggyback loan. The way an 80/10/10 loan works is that an initial mortgage includes the first 80% of the loan balance, and a second mortgage includes the remaining 10%. A second mortgage, sometimes known as a “piggyback loan,” will cover an additional 10% of the purchase price, with the remaining 10 percent coming from the debtor’s cash.
80/15/5 piggyback loan is another alternative for piggyback loans. An example of how this type of loan functions is that it includes a first loan which covers the initial 80% of the amount borrowed. The lender will require a 15% down payment for the second mortgage, with the remaining 5% coming from the borrower’s resources.
Some creditors often provide you with an 80/5/15 piggyback loan alternative; however, there aren’t many lenders promoting this choice on their websites because this is a less popular program.
Reasons to Get a Piggyback Loan
You don’t want to jumbo finance. A piggyback mortgage may be beneficial if you’re purchasing a luxury house or require a loan for a sum more than the maximum conforming loan limit of $548,250 (often referred to as a jumbo loan).
You are anticipating a significant bonus or other payments. If you find the home of your dreams before you can get a substantial commission or bonus, a piggy mortgage may be worthwhile. You can use the cash you receive due to your unexpected windfall to repay the second debt.
You’d like to keep your money in the bank. Many financial gurus recommend establishing an emergency fund that is a minimum of 3 to 6 months’ worth of monthly spending in case of emergency.
Pros and Cons of Piggyback Loans
Consider the following pros and cons of taking out a piggyback loan.
Pros
A smaller down payment. If you don’t have enough money saved for a 20% down payment and wouldn’t want to risk getting priced out of your chosen home, a piggy loan can let you buy a property now rather than waiting until you have enough money saved.
PMI isn’t necessary. If you take out a conventional loan with less than 20% down, you’ll have to pay private mortgage insurance (PMI) until the loan value goes below 80% of the home’s market value. You will not be required to pay private mortgage insurance (PMI) with a piggyback loan because none of your loans will exceed an 80% loan-to-value ratio (LTV).
Avoid taking out a big loan. Another advantage of using a piggyback loan is that it prevents you from having to take out a jumbo mortgage, which is a loan that surpasses the borrowing restrictions imposed by Fannie Mae and Freddie Mac. Jumbo mortgages include higher interest rates and stricter qualifying restrictions than conventional mortgages. If you need to borrow a significant sum of money, breaking it up into two mortgages will help you avoid hitting these snags in the road.
Lower Interest rates. A 75/15/10 piggyback loan can assist you in avoiding the higher interest rates that are generally associated with condo purchases because of the property’s higher loan-to-value (LTV).
Cons
A piggyback loan may be more costly than private mortgage insurance (PMI). Even while paying PMI may put pressure on your finances, combining multiple mortgage payments could be equally taxing. Based on the amount, the repayment on your supplementary loan may be greater than the amount you would have paid in PMI otherwise.
Qualification is more complicated. A piggyback loan necessitates having a low debt burden relative to your revenue and good credit, thus making it more challenging for the lender to authorize you for the loan.
Increase the closing costs twofold. To take out two different loans, you must close with both loans and pay the closing costs. Even though HELOC closing fees are typically smaller than those associated with a standard mortgage, they could add an extra 2% to 5% to the total loan cost.
Refinancing can be a complicated process. To refinance a piggy loan, the secondary mortgage lender must first provide their approval for the transaction. If the supplementary loan lender does not approve the refinancing of the principal mortgage, you may have difficulty refinancing the primary mortgage.
How a Piggyback Loan Works
The following is the procedure for obtaining a piggyback loan: You may get approved for a mortgage for at least 80% of the original cost to buy a property. You can, however, avoid paying the remaining 20% in cash as a down payment by taking out a second loan — generally at a rate of 10% — and then putting the other 10% down with money.
Consider the following scenario: you want to purchase a $200,000 home but only have $20,000 in savings. To use the piggy loan approach, you need to take out a $160,000 mortgage loan (80% ). After that, you can apply for a piggyback loan for an additional $20,000 in cash (10% ). At the end of the process, you’ll pay the balance of $20,000 (10%) as your down payment.
This technique allows you to get both loans at once. When you take out the first loan, you can use the second smaller loan, which is often a home line of credit or equity loan (HELOC) with a draw period of 10 years, to supplement it and satisfy your entire borrowing needs.
Although it is preferable, you are not required to obtain both credits from one lender. Tell your original mortgage lender that you intend to use a piggy loan. They should direct you to a secondary lender who will be able to give the additional finance.
How Do You Qualify for a Piggyback Loan?
Piggyback loan lenders usually have their set standards, and the criteria for various loan types could also differ. However, the following are typical conditions for a piggy loan:
A baseline credit score of approximately 700 is required, with higher success rates associated with ratings of 740 or above.
Get a debt-to-income ratio of 43% (no more) after making both primary and secondary home loan installments. To qualify, the monthly debt payments on both loans should be less than 43 percent of your monthly gross income. This criterion is similar to those for various standard mortgages.
Piggyback Mortgage Lenders
All the mortgage companies listed below provide piggyback loans in addition to regular mortgages. Like USDA, FHA, and conventional loans, among other options. We recommend that you chat with competent piggyback loan lenders from these companies. They will assist you in making an informed choice.
- Alpine Banker
- Northstar Funding
- Bluewater Mortgage
- First Castle FCU
- Arcus Lending
- Citywide Home Loans
- Wholesale Capital Corporation
Final Thought on Piggyback Loan Lenders
These types of loans offer borrowers the chance to get out of debt and avoid foreclosure, while still being able to hold on to their homes.
The best piggyback loan lenders do not charge any fees for the service. This is one of the primary reasons why they are so popular. This means that you can enjoy all the benefits of a home equity line without having to worry about any unexpected charges.
