Jumbo loans are a lending vehicle for home buyers who need to borrow more than the conforming loan threshold allows in order for them to purchase the home they have chosen. They can be a useful tool for high income home buyers who want to avoid the expenses of private mortgage insurance (PMI).
However, qualifying for a jumbo loan requires something that not every borrower has: a larger down payment of at least 10% but just a little higher than conforming loans – anywhere from 10 to 20%, depending on loan size and FICO scores. Additionally, jumbo loan interest rates are sometimes a bit higher than some borrowers may want to pay.
With that in mind, there is another tool that borrowers can use as an alternative to a jumbo loan – one that still allows them to borrow in larger amounts, and also allows them to avoid the costs of PMI or higher interest rates. It’s called a piggyback loan.
Also known as an 80-10-10 loan, a piggyback loan is something we may recommend to those who qualify for a large loan amount in terms of income and credit, but lack the larger down payment amount for jumbo loans.
What is a Piggyback Loan?
A piggyback loan is comprised of two separate loans taken out by the same borrower, for the same home, at the same time. The “piggyback” name is due to the loan being a combination of a first and second mortgage. Normally, the first mortgage is set at 80% of the home’s value; the second is set at 10 to 15%. Then, the remaining 10% is paid in the form of the down payment. This is where the 80-10-10 comes from – although in some cases, the lender may agree to structuring an 80-5-15 loan, an 80-15-5 loan or even a 75-15-10 loan to stay within the parameters of the conforming loan limit. In any case, the first and second digits are always indicative of the first and second loan amounts and the third digit is indicative of the down payment amount.
No matter how the piggyback loan is structured, it can help borrowers who wish to avoid a higher interest rate from a jumbo loan, and/or avoid the added costs of PMI. What’s wrong with PMI, exactly? 1.) It isn’t tax deductible for those making over $100,000 per year (by and large, most jumbo loan borrowers exceed that amount in annual income). 2.) PMI can be a very costly expense, so putting down more money in order to avoid it is worth it to many borrowers.
Piggyback Loans or Jumbo Loans?
There are other factors to consider regarding piggyback loans, including the specifics involved when there is an adjustable mortgage or a home equity line of credit. Whether you apply for a jumbo loan or piggyback mortgage is a decision you need to discuss with a qualified mortgage expert.
A Wholesale Capital Corporation loan officer can provide the guidance and expertise needed to point you in the right direction. Call us today at (855) 640-2020 to speak with a WCC loan officer who can help.
WCC is licensed by the California Bureau of Real Estate, Broker License #01147747 and CA Finance Lender’s License #603K610. Also licensed in Arizona by the Arizona Department of Financial Institutions, MB #0926199. Equal housing lender.