What is a piggyback loan?

Home prices are high these days — and when you throw in elevated mortgage rates, the idea of coming up with a down payment and closing costs can seem daunting.

If you don’t have enough in your personal piggy bank for these expenses, you might be a candidate 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.

What is a piggyback loan?

In a piggyback loan, instead of financing a home purchase with a single mortgage, you’re doing it with two, which you take out at the same time: one big loan and a second, smaller one (the piggy on the back, so to speak). The second loan essentially provides funds towards your down payment.

As a result, the piggyback loan eliminates the need for you to pay for private mortgage insurance (PMI) — which normally gets imposed on conventional mortgages when you can’t come up with at least 20 percent in cash.

Additionally, this arrangement can help navigate around some of the stricter requirements of a jumbo loan. A jumbo loan is a mortgage for an amount that exceeds federally-set limits ($726,200 for most of the country in 2023). If you’re eyeing a high-priced property and to borrow more than the “conforming loan limit” for your area, you’ll need a jumbo — normally. But, by separating the financing into two (smaller) mortgages, you could avoid falling into the “jumbo” category.

How does a piggyback mortgage work?

In an 80/10/10 mortgage set-up, the first mortgage is for 80 percent of the property’s value, and the second piggybacking one is for 10 percent. The remaining 10 represents the 10 percent down payment that you contribute to the home purchase. (Hey, even with a piggy, you have to come up with some cash).

The 80/10/10 is a common piggyback structure, but it’s not the only one. Lenders also sometimes offer an 80/15/5 arrangement, says Greg McBride, CFA, chief financial analyst at Bankrate, which shrinks your down-payment obligation to just 5 percent.

Pros and cons of 80/10/10 mortgage

Pros of 80/10/10 mortgages

• Goodbye, PMI. The main upside to a piggyback loan is the chance to ditch private mortgage insurance. For a conventional loan borrower with 3.5 percent down, the average annual PMI premium ranges from 0.58 percent to 1.86 percent of the loan principal, depending on their credit score, according to the Urban Institute. With a piggyback loan, you can get a reprieve from those insurance payments without having to cough up 20 percent in cash, or to look for a smaller and cheaper home.
• No mumbo-jumbo. Because they’re riskier, non-conforming loans, jumbo loans typically come with the need for a higher credit score, a higher down payment and plenty of cash reserves. If the piggyback arrangement helps keep the financing within conforming limits, you don’t have to worry about the jumbo’s tougher qualifications.
• Less money down. A piggyback loan allows you to contribute much less cash than you normally would — only 10 percent of the purchase price, in the standard 80/10/10 scenario. Some lenders will even let you get by with 5 percent of the cost (the 80/15/5 piggyback).

Cons of 80/10/10 mortgages

• Your payments might change. The second piggybacking loan typically has a higher interest rate, and it’s usually variable, McBride says. So if the interest rate goes up, you’ll pay more.
• You have two sets of closing costs. If you take out a traditional second mortgage, you’ll have two bills for closing expenses. That can add up, eating into any potential savings from avoiding PMI.
• You might have trouble with refinancing. If your loans are through two different lenders, refinancing down the road might not be a simple process.

Piggyback mortgage requirements

Piggyback loans might help you get around some of the requirements of a jumbo loan, but they aren’t necessarily easy to qualify for either. The fact that you’re financing such a large percentage of your home purchase can raise red flags with lenders.

Expect to have your personal finances scrutinized to verify that you can indeed pay back both loans. You still need a strong credit score: about 700 or higher, though some lenders might offer them to people with scores as low as 680.

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.

Alternatives to a piggyback loan

Piggyback loans were more common 10 to 20 years ago, before a lot of low-down-payment mortgage programs became mainstream, McBride says. If you’re stressing over that 20 percent down payment, there are a number of first-time homebuyer loans and and down payment assistance programs that can help you move into a home for less upfront money without the added layer of a piggyback loan:

• FHA loan – Backed by the Federal Housing Administration, an FHA loan allows you to get away with as little as 3.5 percent down on a home purchase. You can also qualify for this loan with subpar credit. The program requires a minimum credit score of 580 for the 3.5 percent down payment. If your credit score is between 500 and 579, you’ll need to put down 10 percent.
• Conventional 97 – Fannie Mae and Freddie Mac, the two government-sponsored enterprises, offer this sort of mortgage. It’s available with as little as 3 percent down.
• VA loan – If you’ve served or are active in the military, you’re eligible for a loan backed by the U.S. Department of Veterans Affairs, and you don’t have to put any money down to get it.

With a low-down payment program, you’ll be able to write a smaller check, but depending on your lender, also might be required to go back to school. For example, Bank of America’s low-down-payment loan program stipulates that borrowers might need to complete homebuyer education courses, as do many state-sponsored HFA loans. However, investing a few hours of your time is a small price to pay to be able to afford your own place.

You might be pondering delaying a home purchase until you can make a more sizable down payment, but McBride points out that the waiting game can be a losing formula.

“Home prices have been rising faster than people could save, so the idea of making the 20 percent down payment is a moving target,” McBride says. “Especially for a first property, it’s entirely plausible to make a smaller down payment to get into that starter home. Then, after a few years, when you trade up to a more permanent home, you have enough equity that it becomes your 20 percent down payment.”

Piggyback strategy for current homeowners

If you’re trying to sell your current home while buying another one, you can try a different strategy that works quite similarly to a piggyback loan. Rather than getting two mortgages on a new property, you can take out a loan secured by your current home to cover all or part of the down payment on the new one. After the sale goes through, you’ll be able to use the proceeds to pay off the home-secured loan.

There are a few types of financing you can use to do this, including:

• Home equity loan: Essentially a second mortgage, it provides a lump sum of cash that you repay at a fixed interest rate.
• HELOC: This is a line of credit that you can draw on over time (rather than receive in a big chunk at one time). The interest rate is variable, so your monthly payments can change.

For both home equity loans and HELOCs, you need to have paid off or substantially paid down the mortgage on your current home: You have to have built up a significant ownership stake to borrow against, usually at least 20 percent of your home’s current value.