A piggyback loan combines two mortgages for the purpose of buying or refinancing a home. Borrowers often use piggyback mortgages to avoid paying private mortgage insurance on a conventional loan when putting down less than 20%. They can also leverage piggyback loans to reduce their down payment or buy a higher-priced home.
But while piggyback financing can be a unique strategy when buying a home, it does come with risks. Before pursuing a piggyback loan, learn how this type of financing works and whether it fits your situation.
The 80/20 home loan is an innovative mortgage product that requires no down payment and can cover your closing costs. It is an increasingly popular option for first-time homebuyers who lack funds for a down payment. This guide will explain what an 80/20 loan is its pros and cons, eligibility requirements and how to calculate your payments.
What is an 80/20 Home Loan?
An 80/20 loan actually consists of two mortgages:
- First mortgage for 80% of the home’s purchase price
- Second “piggyback” mortgage for 20%
Together they provide 100% financing, removing the need for a down payment. With an 80/20 loan, you can buy a home even if you lack savings.
For example. on a $300000 home your loans would be
- First mortgage: $240,000
- Second mortgage: $60,000
The first mortgage has a lower interest rate. The second mortgage charges a higher rate but also has a smaller balance.
Key Benefits of 80/20 Home Loans
An 80/20 mortgage offers several advantages for eligible homebuyers:
- Zero down payment required – The two mortgages equal 100% financing
- Potential closing cost assistance – Borrowers may receive 3% of the purchase price
- Easier to qualify – Two smaller loans are easier to obtain than one large mortgage
- Lower monthly payments – The first mortgage has a lower principal balance
- Build equity faster – No need to save separately for a down payment
If you don’t have cash for a down payment an 80/20 loan allows you to buy now and start building equity sooner.
Who Is Eligible for an 80/20 Home Loan?
To qualify for an 80/20 mortgage, you generally need:
- At least a 620 credit score
- Stable income and employment
- Total debt-to-income ratio under 45%
- Housing debt-to-income ratio under 35%
- Homebuyer education certificate
First-time homebuyers who meet these requirements can benefit the most from 80/20 financing. But the program is also open to repeat buyers and investors.
Lenders have strict eligibility standards for “piggyback” second mortgages. Borrowers with excellent credit scores qualify for the best terms.
How Do Monthly Payments Work?
With two mortgages, your monthly payments are divided into:
- Principal and interest on first mortgage
- Principal and interest on second mortgage
- Any mortgage insurance, taxes, and insurance
Your total monthly costs are higher than a single mortgage. But the first mortgage payment is lower because it has a smaller principal balance.
This helps cash-strapped borrowers qualify and makes monthly budgeting easier. Just be sure to calculate the payments on both loans.
80/20 Loan Calculator
To estimate your monthly payments, use an 80/20 loan calculator. Enter the purchase price, loan amounts, and interest rates.
The calculator runs the amortization schedules for both mortgages. It shows your combined principal, interest, and total monthly payment.
Playing around with the numbers helps you understand the impact of rates and loan amounts. Make sure you can afford the monthly payments before applying.
Pros and Cons of 80/20 Home Loans
Before applying for an 80/20 mortgage, weigh the key pros and cons:
Pros
- Zero down payment required
- May cover closing costs
- 100% financing allows more buying power
- Smaller loans are easier to qualify for
- Build equity faster than renting or saving up
Cons
- Higher monthly costs than a single mortgage
- Second mortgage charges a higher interest rate
- Stricter credit score and debt-to-income requirements
- Second loan may have prepayment penalties or balloon payments
While it requires discipline to manage two mortgages, the 80/20 loan jumpstarts homeownership for qualified buyers.
Alternatives to 80/20 Home Loans
An 80/20 mortgage isn’t the only zero-down option. Here are a few alternatives to consider:
- FHA loan – Requires 3.5% down payment but more lenient credit standards
- VA loan – No down payment for qualified veterans
- USDA loan – 100% financing for homes in rural areas
- 80/10/10 loan – 10% down payment splits financing into three loans
Each program has its own eligibility rules and benefits. Talk to a mortgage officer to weigh your options.
How to Get Started with an 80/20 Home Loan
Follow these key steps when applying for an 80/20 mortgage:
- Check your credit – Minimum 620 score required, but higher is better
- Get pre-approved – Confirms you qualify and how much you can borrow
- Submit loan application – Application includes info on income, assets, debts, and property
- Select a property – Work within your approved loan amounts
- Sign final loan documents – Closing docs include amortization schedules for both mortgages
The process is similar to applying for one mortgage, but may require more documentation. Rates for second mortgages depend on your credit.
The Bottom Line
The 80/20 mortgage removes barriers for qualified buyers lacking cash for a down payment. It provides an innovative path to homeownership through two smaller loans totaling 100% of the purchase price. Just carefully consider your budget and loan terms before committing. An 80/20 loan lets first-time buyers realize the dream of homeownership on their own timeline.
How piggyback loans are structured
→ 80-10-10 piggyback loan: The first mortgage finances 80% of the purchase price, the second mortgage covers 10% and you put down another 10%.
→ 80-15-5 piggyback loan: Similar to above, the primary mortgage covers 80% of the purchase amount, the second mortgage finances 15% and you put down 5%.
→ 80/20 piggyback loan: With this structure, the first mortgage finances 80% of the home price, and the second mortgage covers 20%, meaning you finance the entire purchase without making a down payment. 80/20 mortgages were popular in the early to mid-2000s, but are less common today.
Types of piggyback loans
When taking out a piggyback loan, the second mortgage is typically a home equity product.
- Home equity loan: A home equity loan is a fixed-rate installment loan against a property’s equity. When used as a piggyback loan, the home equity loan serves as a down payment for the primary mortgage. Home equity loans typically have fixed monthly payments and repayment terms ranging from five to 30 years.
- Home equity line of credit: A HELOC is similar to a home equity loan, except it works much like a credit card. When using a HELOC for piggyback financing, borrowers can reuse the credit line after paying it off — as long as the HELOC is still within the draw period. HELOCs have variable interest rates and monthly payments, but their rates are typically lower than home equity loans.
What is the 80/20 Mortgage Rule?
FAQ
What is an 80 20 loan for a mortgage?
What is 80 20 ratio home loan?
Do 80/20 mortgages still exist?
What is the 80 20 rule of loan?
What is the 80/20 loan program?
Our 80/20 loan program includes a first mortgage loan amount that is 80% of the purchase price, and a “piggyback” second mortgage for 20% of the purchase price. No down payment is required. Another great feature of the 80/20 program is that borrowers can obtain up to 3% of the purchase price in Seller Assistance to help with the closing costs.
What is an 80/20 mortgage?
Usually, it refers to taking out a conventional mortgage loan to pay for 80 percent of the house’s value and a second loan in lieu of a 20 percent down payment to cover the rest of the house’s value. An 80/20 loan is a way to pay for a home by taking out two loans: one for 80 percent of the purchase price and another one for the other 20 percent.
Should I get an 80/20 mortgage?
A risk with an 80/20 mortgage is that you may fail to be able to pay it and end up losing your house. This possibility might be higher with an 80/20 mortgage, with a higher total monthly payment, than with a single loan. On the other hand, you may be able to save some cash for emergencies that you would have otherwise spent on a down payment.
What are the risks of an 80/20 mortgage?
The second loan, sometimes called a piggyback loan, often charges a higher interest rate. A risk with an 80/20 mortgage is that you may fail to be able to pay it and end up losing your house. This possibility might be higher with an 80/20 mortgage, with a higher total monthly payment, than with a single loan.