80-10-10 Loan: How Does It Work?

If you want to avoid private mortgage insurance or need a jumbo loan, an 80-10-10 loan could be a solution. An 80-10-10 loan is two loans: a mortgage for 80% of the home value plus a home equity loan for 10% of the downpayment plus a 10% down payment. 

If you have enough for a 10% down payment, this can be a solution that may save you a couple hundred dollars per month. However, it won’t always help you save more. Read on to understand the pros and cons to decide whether this strategy makes sense for you. 

What Is an 80-10-10 Loan?

An 80-10-10 mortgage is two loans: 

• 80% of the home value in the first mortgage
• 10% of the home value in the second mortgage or home equity line of credit (HELOC) 

In addition, you’ll need a 10% down payment. An 80-10-10 mortgage is a type of piggyback mortgage. It reduces the down payment on a home without having to pay private mortgage insurance, helping you secure a home with lower upfront costs. You’ll need to meet the financial criteria, including income, debt-to-income ratio and credit score.

How Does an 80 10 10 Loan Work?

Here’s a detailed explanation of the loan structure of an 80-10-10 loan.

1. First Mortgage (80%)

The role of the primary lender is to provide 80% of the home’s purchase price. Your credit score and debt-to-income ratio can all affect the interest rate and fees on the first mortgage. 

2. Second Mortgage (10%)

The second mortgage covers the remaining 10% of the home’s value. The second mortgage, often a HELOC, will cover 10% of the 

3. Down Payment (10%)

Finally, to make an 80-10-10 loan work, you’ll need to have a 10% down payment. To prepare for the down payment, it’s important to make a savings plan to build up the down payment over time. If the home costs $300,000, coming up with a $30,000 down payment could mean saving for months or years, depending on your income and other expenses. 

Pros of an 80-10-10-Loan

Here is an overview of some of the significant advantages of an 80-10-10 loan. 

Avoid Private Mortgage Insurance (PMI)

Private mortgage insurance usually costs 0.5% to 1% of your loan annually. A $300,000 loan is between $1,500 to $3,000 annually or between $125 and $250 per month.  An 80-10-10 loan is a structure to help avoid additional insurance costs.

Lower Down Payment Requirement

The 10% down payment requirement is more affordable for homebuyers. If you plan to sell your current home and move into a new one, an 80-10-10 loan can act as a bridge loan to help you get the first property with a lower down payment if your original home hasn’t sold yet. 

Then, you can buy a home before your first one sells without paying for PMI.

Easier Loan Approval

An 80-10-10 loan can make it easier to qualify for a mortgage. Buyers looking for jumbo loans can more easily qualify. The Federal Housing Finance Agency (FHFA) limits how much you can borrow with a conforming mortgage.

Borrowing more means you’ll need a jumbo mortgage with stricter requirements than conforming mortgages, including a higher down payment or a lower debt-to-income ratio. If 80% of the home value qualifies for a conforming loan, you’ll improve the possibility of qualifying for the loan. 

Cons of an 80-10-10 Loan

An 80-10-10 loan has significant advantages, including no additional cost savings. Here are the disadvantages to be aware of. 

Two Monthly Mortgage Payments

Paying two monthly mortgage payments can be expensive. You might not end up paying less than PMI. In addition, second mortgage rates might have variable interest rates, leading to higher possible long-term interest rates. 

High-Interest Rates for Both Mortgages

Even if you qualify for an 80-10-10 mortgage, you might pay higher interest rates than the cost of PMI. 

Two Closing Costs 

When you apply for mortgages, you will have to pay closing costs for both mortgages. This can increase the total cost of the loan substantially, cutting into potential financial benefits. 

How to Qualify for an 80-10-10 Mortgage

To qualify for an 80-10-10 loan, you will need to have a good credit score, a low debt-to-income ratio and at least 10% of the total property value for a downpayment. Individual criteria vary by lender. Some lenders require a credit score of at least 600. Generally, with a 10% down payment, the lender will require a higher credit score. 

How to Apply for an 80-10-10 Mortgage

Here’s how to apply for an 80-10-10 mortgage. 

1. Check Your Credit Score

Check your credit score and address any issues that may negatively impact your eligibility. You can access your credit score from all three credit bureaus at annualcreditreport.com. Be sure to check for inaccurate information. 

2. Find a Lender

You can search for lenders online and with local banks or credit unions. Compare their interest rates, terms, fees and eligibility requirements.

3. Gather Necessary Documents

To apply for any mortgage, documents you’ll need include government-issued ID, proof of income like pay stubs or W-2s, tax returns, bank statements and gifts received if you received a large transfer. 

4. Get Preapproved

Contact your lender of choice and complete the preapproval process. You can also complete preapproval with multiple lenders within a short period without harming your credit score significantly. Note that you’ll need preapproval for the 80% mortgage and the second mortgage. 

5. Submit a Loan Application

Once you have preapproval and a property you’re ready to buy, it’s time to submit the final loan application. Provide accurate and detailed information about your income, assets, debts and the property you are buying.

6. Close the Loan

If approved, attend the closing meeting, sign the necessary paperwork and provide any required funds to finalize the loan. Then, you’ll need to close on the second mortgage as well. 

Get 80-10-10 Loans with Benzinga’s Top Mortgage Brokers

Find some of the best mortgage brokers with low rates and fees for an 80-10-10 mortgage loan. 

Getting to an 80-10-10 Loan

An 80-10-10 loan can be a good option to help you qualify for a jumbo mortgage or in place of a bridge loan while you sell your house. You can also consider a smaller home — and a smaller mortgage — or a bridge loan. For many borrowers, an 80-10-10 loan can give you the additional funds needed to secure the home of your dreams. Learn how to shop for a mortgage and find the best mortgage here. 

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