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A piggyback loan can be a great way to avoid paying private mortgage insurance (PMI) or to buy a home that’s above conforming loan limits. But qualifying for a piggyback loan can be a bit more challenging than qualifying for a single mortgage. That’s because you’ll need to qualify for both the primary mortgage and the second mortgage, which is typically a home equity loan or home equity line of credit (HELOC).
Here are some of the factors that can make it hard to get a piggyback loan:
- Credit score: You’ll need a good credit score to qualify for both the primary mortgage and the second mortgage. The minimum credit score requirements will vary depending on the lender, but you’ll generally need a score of at least 660 or 680 to qualify for a piggyback loan.
- Debt-to-income ratio (DTI): Your DTI is the percentage of your monthly income that goes towards debt payments. Lenders will use your DTI to assess your ability to repay the loan. To qualify for a piggyback loan, you’ll typically need a DTI of 43% or lower.
- Down payment: You’ll need to make a down payment on both the primary mortgage and the second mortgage. The minimum down payment requirements will vary depending on the lender, but you’ll typically need to put down at least 10% on the primary mortgage and 10% on the second mortgage.
- Property type: Some lenders may be hesitant to offer piggyback loans on certain types of properties, such as condominiums or fixer-uppers.
- Lender requirements: Different lenders have different requirements for piggyback loans. Some lenders may be more flexible than others, so it’s important to shop around and compare offers from multiple lenders.
How to Increase Your Chances of Qualifying for a Piggyback Loan
If you’re interested in getting a piggyback loan, there are a few things you can do to increase your chances of qualifying:
- Improve your credit score: The higher your credit score, the better your chances of qualifying for a piggyback loan. You can improve your credit score by paying your bills on time, keeping your credit utilization low, and avoiding opening new credit accounts.
- Pay down debt: The lower your DTI, the better your chances of qualifying for a piggyback loan. You can pay down debt by making extra payments on your credit cards and other loans.
- Save for a larger down payment: The more money you can put down on both the primary mortgage and the second mortgage, the better your chances of qualifying for a piggyback loan.
- Shop around for lenders: Different lenders have different requirements for piggyback loans. It’s important to shop around and compare offers from multiple lenders to find the best deal.
- Consider using a mortgage broker: A mortgage broker can help you shop around for lenders and find the best deal on a piggyback loan.
Even though qualifying for a piggyback loan can be slightly more difficult than for a single mortgage, approval is still achievable. You can improve your chances of receiving a piggyback loan and using it to purchase your ideal home by heeding the advice provided above.
Frequently Asked Questions
What is a piggyback loan?
One kind of mortgage that combines two loans into one is called a piggyback loan. The majority of the purchase price is covered by the first loan, which is a primary mortgage. The remaining purchase price is covered by the second loan, which is a smaller loan that is usually a home equity loan or home equity line of credit (HELOC).
How does a piggyback loan work?
When you take out a piggyback loan, you’re essentially taking out two loans at the same time. The first loan is a primary mortgage that covers the majority of the purchase price. The second loan is a smaller loan, typically a home equity loan or home equity line of credit (HELOC), that covers the rest of the purchase price.
The primary mortgage is typically a fixed-rate mortgage, while the second mortgage is typically a variable-rate mortgage. This means that the interest rate on the second mortgage can fluctuate over time.
Why would I get a piggyback loan?
There are a few reasons why you might consider getting a piggyback loan:
- To avoid paying private mortgage insurance (PMI): If you’re putting down less than 20% on a conventional loan, you’ll typically have to pay PMI. A piggyback loan can help you avoid paying PMI by allowing you to finance the entire purchase price without making a 20% down payment.
- To buy a home that’s above conforming loan limits: Conforming loan limits are the maximum amount that Fannie Mae and Freddie Mac will purchase for a mortgage. If you’re buying a home that’s above conforming loan limits, you’ll need to take out a jumbo loan. Jumbo loans typically have higher interest rates and stricter requirements than conforming loans. A piggyback loan can help you buy a home that’s above conforming loan limits without taking out a jumbo loan.
- To reduce your down payment: A piggyback loan can help you reduce your down payment by allowing you to finance a larger portion of the purchase price. This can be helpful if you don’t have a lot of money saved up for a down payment.
What are the risks of getting a piggyback loan?
There are a few risks to consider before getting a piggyback loan:
- You’ll have two monthly mortgage payments: With a piggyback loan, you’ll have two monthly mortgage payments to make. This can be a significant financial burden, so it’s important to make sure you can afford both payments.
- The interest rate on the second mortgage may be higher: The interest rate on the second mortgage is typically higher than the interest rate on the primary mortgage. This means that you’ll pay more interest over the life of the loan.
- It can be harder to refinance or sell your home: If you have a piggyback loan, it can be harder to refinance or sell your home. This is because lenders may be less willing to lend to you if you have two mortgages.
How do I qualify for a piggyback loan?
You must fulfill the prerequisites for both the primary mortgage and the second mortgage in order to be eligible for a piggyback loan. The specific requirements will vary based on the lender, but generally speaking, you’ll need a low debt-to-income ratio (DTI), a good credit score, and a down payment of at least 2010 percent on both the primary and second mortgages.
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- Piggyback loans are a type of loan where two mortgages are obtained at once. The first mortgage is for 80% of the home’s value (E2%80%99), and the second mortgage is for 2010%.
- By using the piggyback technique, you can avoid needing a jumbo loan or private mortgage insurance.
- A variant of the piggyback strategy that homeowners looking to move into can use is utilizing a home equity loan or credit line for the second, smaller mortgage.
These days, with high home prices and high mortgage rates, saving money for a down payment and closing costs can seem impossible.
Should you find yourself short on funds for these out-of-pocket expenses, you may qualify for a piggyback loan. Also called an 80/10/10 or combination mortgage, it involves simultaneously getting two loans to buy one home.
The strategy can save you a lot of money; in fact, it can even make the purchase possible. Here’s how it works.
Cons of 80/10/10 mortgages
- Your payments might change. According to McBride, the second piggybacking loan usually has a variable interest rate and a higher interest rate. So if the interest rate goes up, you’ll pay more.
- You have two sets of closing costs. Closing costs associated with a traditional second mortgage will result in two bills. That could add up and reduce any possible financial gains from avoiding PMI.
- You might have trouble with refinancing. If you have loans from two different lenders, it might not be easy to refinance in the future.
Although piggyback loans can help you avoid some of the requirements associated with jumbo loans, qualifying for them isn’t always simple. Lenders may become suspicious of you if you’re financing such a big portion of your house purchase.
Expect to have your personal finances scrutinized to verify that you can indeed pay back both loans. Although some lenders may accept applications from borrowers with credit scores as low as 680, you still need to have a good credit score of at least 700.
It’s wise to reduce your debt-to-income ratio (DTI) ratio as much as possible before applying, too. You should aim for a DTI of 36 percent or less, including the repayments of both loans. Some lenders might be willing to go a bit higher than that.