How to Get an 80/20 Mortgage
What it is
| At a Glance | |
|---|---|
| Loan Type: | Mortgage |
| Lender: | Bank |
| Secured: | Yes |
An 80/20 mortgage is a mortgage that helps homebuyers that need 100 percent financing find more affordable financing. With this scenario, the home buyer takes out two loans. The first loan is for 80 percent of the home's purchase price and the second is for 20 percent of the home's purchase price. The borrower is expected to come up with the closing costs. It allows people to buy without a down payment and without touching their savings.
Many mortgage programs allow borrowers to buy houses with little or no money down, but they require private mortgage insurance that protects the lender from the costs of foreclosing on a house when the borrower falls too far behind on the loan payments. Since mortgage insurance is required for loans over 80% of the home's price, an 80/20 mortgage doesn't require mortgage insurance. An 80/20 mortgage is called a piggyback loan because the second mortgage is used to back up the first mortgage. Other combinations are available. For instance, an 80-15-5 is a mortgage for 80 percent of the purchase price, a piggyback loan for 15 percent and a five percent down payment.
Who it's for
An 80/20 mortgage is targeted at young people who are tired of paying rent. These people 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 a 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. The 80/20 mortgage is attractive to young professionals and people who have recently graduated from college and have good jobs and good credit.
What you need to do to apply
In order to obtain a property improvement loan, a borrower must contact several lenders or mortgage brokers and determine which ones originate FHA loans. Each lender sets its own rates and terms.