But I don’t get it. 2020 started just like the many of the years that preceded it. Sure, there was a seasonal slowdown in home buying activity as we got through 2019’s holiday season and got the new year underway, but with interest rates at historic lows, a strong seller’s market in the San Francisco Bay Area and lots of buyer competition for any desirable home that came on the market, it looked like deja vu all over again for anybody looking to purchase a home. In other words, here we go again with having to come up with a large down payment (or even all cash), a push to offer without any contingencies in your contract and a general sense that it was going to take an act of God to actually get into contract.
Well, we got the act of God part. Just not the one that any of us, save for the disbanded Global Health Security and Biodefense Unit, had planned on…
So, here we are, going into the heart of the spring buying season, in the middle of shelters-in-place and a COVID-19 pandemic. Yet with all due respect given to the very real health concerns most of us share, real estate is an essential activity and some buyers and sellers have no choice but to be “on the market.” For a handful of these buyers, who are not yet in a position to have saved a full 20%, or who have seen the value of their stock portfolios decimated by recent market volatility, a 10% down payment may be the only realistic way to purchase a home during the months to come.
The good news is that they can still do it.
“What is 80-10-10 Financing?”
I remember my grandmother calling the refrigerator a “Frigidaire” and our jeans “Dungarees.” So it is with 80/10/10 financing. It’s sort of the brand name we bandy about when what we’re really discussing is a concept, and the manifestation of that concept is subordinate financing, AKA as a “piggyback loan.” Most simply described, a buyer using this structure will be obtaining two loans instead of one in the purchase of a home. This is often referred to in broad strokes as an “80-10-10” loan.
“How Do 80/10/10 Loans Work?”
When we say “80/10/10” we are specifically implying the following:
- A first mortgage to 80% of the home’s purchase price.
- A second mortgage equal to 10% of the home’s purchase price.
- A buyer’s down payment for the remaining 10% of the purchase price.
Since the lending world is replete with guidelines, it doesn’t always play out exactly this way, and for any number of reasons. Just keep in mind that “80-10-10” could also just as easily be 75-15-10, or sometimes when we need to use a conforming first mortgage, you could even see a 62-28-10, for example. You get the idea, we don’t always have to be at a strict 80% and 10% for the loan amounts. But no matter how we structure the transaction, the sum of both loan amounts plus the down payment will equal 100% of the purchase price.
“Can I Qualify for a Piggyback Mortgage”
When obtaining a jumbo 80-10-10 loan, the first mortgage will typically be a fixed rate loan (30-year fixed) or a hybrid ARM (10/1 ARM, 7/1 ARM or 5/1 ARM). The second mortgage is most often a home equity line of credit (HELOC). There can be different qualifying criteria for both loans and your loan officer will have to navigate two sets of guidelines in most cases. Not all loan originators are adept at subordinate financing but for my clients, the pre-approval process for a piggyback loan is identical to the process for obtaining a single loan — we understand it on every level. While an 80-10-10 can sometimes be harder to obtain than a single loan, there are also cases where it can enable an approval that otherwise would not exist. For example, a buyer may not qualify for a single loan of $750,000, but may pass with flying colors if the loan is restructured as a first mortgage of $625,000 and a second loan of $125,000. Same total sum borrowed, but two very different outcomes.
In a very uncertain time, we presently have the capacity to allow a buyer to make a 10% down payment, using the 80-10-10 structure, on a purchase price almost as high as $2,200,000. And here in the San Francisco Bay Area, this is not an uncommon scenario. Sellers may not have the luxury of waiting around to get multiple offers in a market defined by the great uncertainty we all face today. But in these challenging times of being shut in, will lie opportunity for the buyer who may have previously been shut out. If I can help you better understand the inner workings of a 10% down payment mortgage option, we are available and open for business.
Take care and stay safe,
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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