When my husband bought his first house in January 2005, he qualified for and took on a piggyback loan. Basically, my husband took a traditional 80% mortgage on his new house, and also took a 20% mortgage in the form of a higher-rate home equity line of credit to cover the “down payment.” He took this option as a way of avoiding mortgage insurance, since he didn’t have enough money saved to cover his down payment.
This 80/20 type of piggyback mortgage was quite popular before the housing crash, as it allowed borrowers to buy a house with no money down. Of course, we all know what came of it: borrowers who took on more house than they could afford. When these borrowers defaulted, our economy took a major hit.
You might think that lenders would’ve banned piggyback mortgages forever because of the housing crisis, but apparently these types of mortgages are making something of a comeback. While you can no longer get the kind of 80/20 mortgage my husband had, there are still some piggyback options available to homebuyers in 2013.
Here’s what you need to know about the return of the piggyback mortgage:
A Lower Combined Loan-to-Value
Banks no longer want borrowers to show up with no down payment when buying a house, which is why the 80/20 piggyback mortgage has gone the way of the dodo. But if you have some portion of a down payment, you may be able to find a bank willing to finance a piggyback mortgage with a combined loan-to-value of 85% or 90%.
Basically, this means that you’ll need to come up with a down payment of 10% to 15%, and you can get 85% to 90% financed through the first and second mortgage. This is actually beneficial for both you and the bank; the financer takes on less risk, while you start off home ownership with more equity than my husband had with his 80/20 piggyback.
Tighter Borrower Requirements
One of the reasons why piggyback loans had such disastrous results during the housing bubble was that credit was so easily offered and accepted. Banks have (theoretically) learned their lesson, and have tightened up the borrower requirements for piggyback mortgages (not to mention traditional mortgages).
According to Bankrate.com, “For a borrower to get a piggyback loan today, lenders typically require a FICO score of at least 700. As well, they typically look for a total debt-to-income ratio of no more than 43 percent and expect borrowers to have some cash reserves.”
It’s important to note, however, that these typical rules might not be as stringent as the ones you encounter at your bank. Banks don’t want to get burned again, and so even though the piggyback mortgage may be making something of a comeback, you may find that the stringent requirements make it basically impossible to take advantage of one.
The Bottom Line
While piggyback mortgages are becoming more common — they accounted for 3.8% of loans originated in 2012, as compared to 1.7% of loans in 2010 — they are still a pretty rare banking product.
Borrowers with excellent credit, a low debt-to-income ratio, and not quite enough money saved for a down payment might be able to make good use of this type of loan — but it is ultimately smarter to simply save a little longer until you do have the down payment necessary for your dream home.
Have you ever considered or used a piggyback mortgage?