What Is an 80-10-10 Mortgage Loan?

How Do 80-10-10 Mortgages Work?

When homebuyers don't have 20% to put down on a home purchase, lenders typically compensate for the added risk by requiring them to purchase private mortgage insurance (PMI). That's one way an 80-10-10 loan comes in handy. It is a type of piggyback loan that allows you to acquire a mortgage even if you can't afford the standard 20% down payment but don't want to pay PMI.

In certain cases, an 80-10-10 mortgage can also help you buy a more expensive home without the need to apply for a jumbo loan, which often comes with stricter requirements.

The First Mortgage

With an 80-10-10 loan, the first mortgage is a conventional loan that finances 80% of the value of your home. It's typically a fixed-rate mortgage, but you may also have the option to choose an adjustable-rate loan.

The Second Mortgage

The second mortgage covers 10% of your home's value and "piggybacks'' on top of the first loan. It may come with a higher interest rate, but any interest paid on the second mortgage is tax-deductible (up to IRS limits). PMI premiums are not. The second mortgage might be a home equity loan or home equity line of credit (HELOC).

A home equity loan typically comes with a fixed interest rate and predictable monthly payments. A HELOC usually comes with variable interest rates and works a lot like a credit card. You withdraw money as needed during a set period of time, called a draw period, and only pay interest on the amount you borrow. Once the draw period ends, you must pay off the balance in full.

The Down Payment

Many banks require a 20% down payment on a home purchase. If you can't come up with that amount, you might be required to pay private mortgage insurance. This is an added expense that can increase your monthly mortgage payments and make your loan more expensive. But with an 80-10-10 loan, you're only required to put 10% down and you'll pay no PMI, which can make your monthly payments much more manageable.

Pros and Cons of an 80-10-10 Mortgage

While an 80-10-10 mortgage has many benefits, like helping homebuyers get into a home without a large down payment, these types of loans also have several downsides.

Benefits of an 80-10-10 Mortgage

• Lower monthly payment: It's possible your monthly mortgage payment will be lower as you're not paying PMI, even if you're paying off a second loan concurrently.
• Smaller down payment without PMI: Many lenders require you to pay mortgage insurance if you can't make the 20% down payment. With an 80-10-10 loan, you put down only 10% and still avoid paying PMI.
• Tax deduction: Sometimes the interest rate on a second mortgage is higher than on a first mortgage, but any interest paid on the second mortgage is tax-deductible up to IRS limits.
• Minimize the gap until your home sells: Because you don't have to come up with a sizable down payment, you may be able to cover the down payment on a new home even if your current home hasn't sold.
• Forego a jumbo loan: With an 80-10-10 loan, you can avoid the requirements of a jumbo loan if you use the primary loan to finance the first $647,200 of the home price and pay the rest with a secondary loan, plus the 10% as a down payment.

Downsides of an 80-10-10 Mortgage

• May complicate opportunities to refinance: If at some point in the future you decide to refinance your mortgage for a better rate and term, having two loans may make it more difficult to qualify. In fact, your lender may require you to pay off your second mortgage before approving your new loan.
• Good credit score required: You'll likely need a credit score of very good (740-799) to exceptional (800-850) to qualify for an 80-10-10 loan.
• Qualify for two separate loans: With an 80-10-10 loan, you will need to apply and qualify for two separate loans. That means you will likely need to meet the requirements of two lenders instead of just one as with a traditional mortgage.
• Closing costs on two loans: With an 80-10-10 loan, if you apply for a loan through two separate mortgage companies, you often have a separate closing for each loan, with all the fees and costs involved.
• Higher interest rate: The second mortgage on an 80-10-10 loan will often carry a higher interest rate, which may also be adjustable versus fixed, especially in the case of a HELOC. If the adjustable interest rate jumps, so will your monthly payment.
• Higher debt-to-income ratio (DTI): Most lenders like to see a DTI of 43% or less. That means your total monthly debt payments should be less than 43% of your gross monthly income. Carrying two mortgages (especially if you're trying to finance a more expensive home) could push you above this limit. This will make it more difficult to qualify for other loans, such as personal or auto loans, in the future, and may even make qualifying for the second mortgage harder.

How Do You Get an 80-10-10 Mortgage?

Some lenders offer 80-10-10 loans with both primary and second mortgage loans approved together. But it's just as likely you'll have to find different lenders for the first and second mortgages. Not all lenders offer 80-10-10 loans.

As with any mortgage, lenders look at your finances when you apply for an 80-10-10 loan. They will review your credit score, credit history, DTI and employment history and verify that you have sufficient income to make payments on two loans. As mentioned earlier, you'll also likely need a very good to excellent credit score to qualify.

Alternatives to an 80-10-10 Mortgage

If you're not sure an 80-10-10 mortgage is right for you, there are other options to consider.

Make a Larger Down Payment

If you can swing it, you may want to bite the bullet and make the standard 20% down payment. You'll have a smaller loan balance to pay off over time and possibly more loan options with better terms. Making a larger down down payment also means you'll pay less in interest and make lower monthly payments. If you don't have enough in savings to put 20% down, consider waiting until you've saved up the needed amount before shopping for a home.

Government-Insured Loans

FHA loans are insured by the Federal Housing Administration and may only require a down payment of 3.5% depending on your credit score. However, you must pay mortgage insurance on FHA loans and your interest rate may be slightly higher than with a conventional loan.

VA loans are guaranteed by the U.S. Department of Veterans Affairs. They do not require eligible service members, qualified veterans and surviving spouses to make a down payment and also require no PMI. VA loans may also offer better rates and terms than other loans from banks, credit unions or mortgage lenders.

USDA loans from the U.S. Department of Agriculture are $0 down mortgages offered to eligible low-income rural and suburban homebuyers. Like VA loans, they also offer competitive interest rates.

Pay Private Mortgage Insurance

If you determine that your PMI payments will be less than your second mortgage payments with an 80-10-10 loan, you may just have to knuckle down and pay for private mortgage insurance. But, once you have 22% equity in your home or you're halfway through paying off your mortgage, lenders are required to cancel PMI on your loan.

Get a Jumbo Mortgage

If you're eyeing a significantly more expensive home than most properties in your community, you may consider a jumbo loan. These large loans do not conform to Fannie Mae and Freddie Mac loan limits, so they tend to be riskier for lenders. As such, lenders typically have strict eligibility requirements for these loans, including a high credit score and a down payment of 20% or more.

The Bottom Line

If you don't have the standard 20% down payment and want to avoid PMI, an 80-10-10 loan may be the answer. But you'll need very good credit to qualify. You can find out how your credit measures up by regularly checking your credit report and credit score at Experian. You can also use the mortgage calculator to see if this type of loan will save you money when compared with a traditional mortgage that requires PMI.