If you have only 10% down payment and do not wish to pay a private mortgage insurance (PMI), we have the right solution for you – 80/10/10 loan. Yes, it’s back and this post will give you all the details you need to know.
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% down payment. So if you had 10% down payment 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.
Show Me The Numbers:
- Example #1 – Using 80/10/10 loan to avoid PMI
Say you are buying a house worth $650,000 and you only have 10% down payment 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 $875,000 house and had only 10% downpayment. You won’t qualify for any loan if 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 $680,000 (rounded off)- with a 10% down your maximum loan amount can’t exceed $680,000. But with an 80/10/10 loan, you can buy an $875,000 house by putting down only 10%. The first loan is not exactly 80% of the home value, but the program still works to help you buy a house like this with only 10% down.
- Example #3 – Using 80/10/10 loan to avoid paying jumbo mortgage rates
Say you are buying a $900,000 house and have 20% down payment. You can get one loan of $720,000. But you don’t want to exceed the conforming limit and don’t want to pay the higher interest rate of a Jumbo loan. In this example, you can get a $680,000 loan on the 1st (assuming that is the loan limit in your county) and can get a HELOC for $40,000. You are still paying 20% down, so technically it’s not an 80/10/10 loan. But using a HELOC on the 2nd and splitting the loan into two, you can avoid more restrictive underwriting guidelines for 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 is required for a total loan amount of $750,000 and 730 for a total loan amount of $1.5 million.
Some of the additional guidelines for the HELOC is mentioned below:
- No foreclosure, deed-in-lieu, short sale or “real estate account paid for less than full balance” within the last 5 years. No bankruptcy filing within the last 8 years.
- First 10 years draw period, next 20 years repayment period
*The 80/10/10 loan is not available in all the states*