You want to buy a home but the thought of paying Private Mortgage Insurance doesn’t thrill you. If you don’t have the 20 percent down payment, though, you don’t have much of a choice, unless you use the piggyback loan option.
What is a Piggyback Loan?
Just like it sounds, a piggyback loan is a loan on top of your first mortgage. Rather than getting the entire own payment from your funds (or a gift), you get them from a 2nd mortgage. This loan uses your home as collateral, just like the first mortgage, but takes second lien position.
Most people borrow 10 percent of the home’s purchase price with the second mortgage. If you borrow 80 percent with the first mortgage, that leaves you with just a 10 percent down payment.
For example, you buy a home for $200,000. You get approved for a first mortgage of $160,000. If you apply for and get approved for a 2nd mortgage for $20,000, you only need a $20,000 down payment versus a $40,000 down payment without the piggyback loan.
Qualifying for a Piggyback Loan
Since the piggyback loan is the lender’s loan and not one that’s backed by a government agency, lenders can create their guidelines. Usually, you can get a piggyback loan simultaneously with the first mortgage from the same lender if you have:
- Decent credit scores (usually a 680 or higher)
- A low debt ratio (43% or less)
- The home appraises for at least as much as the purchase price
How to Get a Piggyback Loan
You can get a piggyback loan in a variety of ways. Some lenders give a home equity loan, which is a one-time loan. They disburse the funds at the closing and you make principal and interest payments right away.
