What’s a Piggyback Mortgage?

As if! As if mortgages weren’t complex enough, now you’re going to tell me there’s such a thing as TWO mortgages stacked on top of each other — just to buy the same home you could otherwise get with one mortgage?  Are you a glutton for punishment?

OK, calm down. You’re correct about the part that adding a second, or “piggyback,” mortgage might add complexity, but you’re not quite right about the fact that our buyer could have just as easily killed the proverbial financing bird with one stone/loan. Often, when we suggest borrower consider secondary financing, aka a piggyback loan, there’s a good reason for it, and we’re going to cover the top three of them below. If you view piggyback loan options as another tool in the mortgage toolbox, then you’ll start to see the value they provide when certain circumstances arise. So let’s jump into the mud with the pig.

Avoiding PMI

Most buyers are aware that once their loan-to-value (LTV) exceeds 80% (in other words, they have less than a 20% down payment), they will be faced with private mortgage insurance (PMI). Some will therefore try to avoid this by breaking the financing into two loans, with the first mortgage at 80% of the value of the home, and the second or piggyback loan filling in the gap between the first mortgage and the buyer’s down payment. Classic example: $500K purchase price and a 10% down payment ($50K). The loan amount would be $450K and the buyer would have PMI, unless the buyer gets a first mortgage at $400K and a piggyback loan at $50K. In the piggyback example, the buyer is still going to finance a total of $450K, but because his first mortgage LTV is not over 80%, there is no PMI. Now, this same buyer will need to compare the terms of the financing. Will it be better/cheaper to go with PMI or the piggyback? Only the research will tell.

Circumventing Conventional Loan Limits

In the above example, we used a piggyback loan to avoid PMI, but what about purchase price points that would force an 80% LTV to be just above the conventional conforming loan limit? Same deal. Some of these buyers will circumvent that cutoff by using a piggyback. Today, for instance, the conforming loan limit in many areas is $484,350. But let’s say the buyer is considering a home that will sell for $675K. At 80% LTV, the loan amount would be $540K — above the conforming loan limit by $55,650. So, from time to time, we’ll see a buyer get a $484,350 first mortgage coupled with a $55,650 second mortgage and voila’, jumbo mortgage avoided.

Jumbo 80/10/10

Speaking of jumbo mortgages, especially in higher cost areas like the San Francisco Bay Area, even if you endeavor to buy a median-priced home with less than a 20% down payment, you will need a mortgage solution that often deviates from a single loan.  Jumbo 80-10-10 options have been popular in our neck of the woods since at least 2015 and the reasons for that are primarily that the terms are very competitive and there is no PMI. If a buyer wishes to purchase real estate with less than 20% down and we’re talking about price points up to $2MM, we almost always consider a piggyback loan as one of the first tier options. In some parts of my county (Marin), in San Francisco, on the Peninsula and in the Silicon Valley, one can easily find a typical residence in the $1.2MM price point. If you’re putting 10% down on something like this, you’d have a first mortgage at $960K and a second mortgage, usually a HELOC, at $120K. This would be contrasted with any other single-loan jumbo option, though as the price points increase, it gets harder to find and qualify for such programs for many buyers.

While we always try to keep matters as simple as possible, because we realize that real estate transactions are inherently complex, sometimes there’s just no good way to avoid a piggyback mortgage solution. When you find yourself in this situation, we can help and we offer a wide array of both first and second mortgage programs that can be combined together to meet your needs. Oh, and when you do need a piggyback setup, we handle both loans as part of your singular process. We don’t send you out into the mud to fend for yourself on the first or second loan. We’ve got your (piggy) back.

Ha ha, charade you are, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

 

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Jumbo Mortgage with 5% Down Payment

You never hear anyone say “Give it 95%!,” do you? And, curiously, when it comes to getting a jumbo mortgage, that still holds true — the vast majority of home buyers still think it takes a 20% down payment to enter the market. As of 2019, there are 34 metropolitan statistical areas (MSAs) in California that have a maximum conforming loan limit of $484,350. Another handful of counties can only get to a jumbo-conforming limit of around $550,000. So what do these homebuyers do if they have a maximum of a 5% down payment yet need to exceed the conforming or FHA loan limits? Are they shut out or can they actually buy a home with a jumbo mortgage? The good news for them is that we will continue to lend up to $650,000 with as little as 5% down (for a maximum purchase price of approximately $685,000) and we’ll pick up where their county’s conforming loan limits may leave off. And, in many cases, we can make these 95% loans without PMI, or private mortgage insurance. Using our LPMI (lender paid mortgage insurance) program, we can go to a loan amount of $850K with just 5% down, giving these buyers the reach up to a purchase price of almost $900K. Let’s dive 100% in and look at the key features of our 5% down jumbo program.

There are a few key distinctions between a jumbo and conforming loan and it’s important to understand these if you are going to purchase a property in a higher price range. All of these aspects can be sorted out at the time you get a pre-approval from us, and this process does not cost you any money or involve any obligation. Your preapproval is valid for at least 90 days and can be refreshed if your search extends beyond that time period. Let’s focus on the Big 3; FICO scores, asset reserves and debt-to-income (DTI) ratio:

FICO Minimum for 5% Down Jumbo

You’ll need a minimum 700 FICO score to get to a loan amount of $650K and a 720 FICO up to $850K. For jumbo mortgages in general, especially at a higher loan-to-value (LTV), getting down to 700 is very generous. Of course, the higher your FICO the better your loan’s rate might be, but it’s good to know you can still qualify with greater than a 700 (or 720) score.

Asset Reserves for 5% Down Jumbo

Reserves are a component of getting a jumbo loan — c’est la vie, as they say. But fortunately our 95% LTV jumbo loan does not have an onerous reserve requirement. In fact, in some cases we need just two months of reserves but for most options here, it is never greater than six months. Compared to other 90% jumbo mortgage options that require 18, 24 or 36 months of reserves, this makes qualifying far easier. Remember, reserves are calculated from your total monthly housing payment (PITI). If you have a PITI of $4000 and you have a 6 month reserve requirement, you need to have $24,000 left in your bank account(s) after you close your purchase transaction.

Debt-to-Income (DTI) for 5% Down Jumbo

Since this is a jumbo mortgage, your debt-to-income ratio will need to be under 43% in most cases. How do we arrive at this number? Let’s say you have a gross monthly income of $10,000. If your housing payment is $4000, you have a 40% “front end” or “housing” DTI ($4000 / $10,000). Let’s say you also have a car payment of $250. Now you have a debt ratio of 40% over 42.5%, and you’d still qualify. Your “total” or “back end” ratio is your proposed housing payment, plus any other monthly debts that come over from the credit report. Total debts divided by gross income equals total DTI.

The long-held belief that it takes a 20% down payment was shattered long ago when we offered competitively priced 10% down payment solutions up to price points of $2MM. Many buyers still take advantage of those programs today. But even where the price points go to $700K or even $900K, now buyers have the option to bring in only 5%, often without private mortgage insurance (PMI). If you want to know more and are intent on getting out of the rent cycle, call me today and let’s see if this program is a fit for you.

Gimme five, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Still Think You Need 20% Down? Ain’t That a Shame

Back in late 2017, with the passing of Fats Domino, we lost a rock ‘n’ roll legend and pioneer.

 

But nearly every week we lose transactions simply because of the unquestioned and untested myth that every buyer needs to bring in at least a 20% down payment, especially here in California where many of our home prices require loans that exceed the conventional and FHA loan limits. In addition to simply not recognizing that many great programs exist in order to accommodate a 10% down payment on a jumbo mortgage, here are the two other challenges we commonly see:

Getting Approved

Putting down 10% means borrowing 90% and that translates to a larger housing payment and a higher debt-to-income (DTI) ratio. I’d say that my team and I are the best in the west when it comes to understanding the programs available and the parameters our clients must meet in order to become approved borrowers. Sometimes you not only have to think outside of the ordinary credit box, you have to approach future success as if no box exists. While many of our competitors will try to shoehorn a buyer into a 20% down mortgage by having them ask family for gift funds or by suggesting they raid their 401K accounts, we’re going to focus first on what a buyer can do on her own and we’re going to determine the outside limits of her qualifying power. From there, this buyer can determine a responsible budget and strategy, but do so with more cards on the table.

Getting Into Contract

Once we have a loan pre-approved (or underwritten in advance), our next challenge will be to have our buyer’s offer seriously considered alongside the others that may come in on any desirable property. Here, we may encounter a listing agent who wants to take no chances or who is just not aware that 10% down strategies are again very viable for qualified buyers. Instead of defending a position of “Well, your buyer only has 10% down…,” we look at it as, “Our buyer is strong enough to qualify for this type of program!” And then, we back it up with a lot of experience. Winning any offer is a blend of luck and skill, but when we support one of our 10% down client offers, we do not do so from a position of weakness.

It’s a quote often attributed to Mark Twain that goes, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”  And while we’re on the topic of “ain’ts,” it is a shame that more buyers are not aware they can win with 10% down. We do it all the time and we’re here to help them find the thrill of home ownership with less than a 20% down payment.

I’m walkin’, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959 Fax: 415-366-1590
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

How to Get Rid of PMI on Your Mortgage

Nearly every home buyer initially hates the “P” word — PMI, or private mortgage insurance. Years and years of conditioning have taught generations upon generations of first-time buyers that PMI is something to be avoided at all costs, and even though I daily go to great lengths to demonstrate this is patently untrue, even those that come to see the light about PMI and find themselves with a form of private mortgage insurance will soon arrive at their next concern:  “When can I remove the PMI from my payment?”

Good Housekeeping

In the spirit of efficiency, let’s cover some basics first:

  1. We’ll be talking about conventional PMI here, not the FHA version. FHA insurance (MIP) does not adhere to these rules.
  2. All of our guidance here assumes that the borrower is current on payments. If there have been delinquencies, the game could change.
  3. The Homeowners Protection Act (HoPA) of 1998 dictates that when a loan with PMI reaches a loan-to-value (LTV) of 78%, based on the original value, PMI must be canceled by the servicer. This is known as “auto termination.”
  4. We’re going to base our guidance here on “agency” guidelines and that means the interpretations of Fannie Mae and Freddie Mac. You must always get specific policy from your servicer (the company to whom you send your payments).
  5. We’re limiting the scope of our conversation to one unit properties. Multi-unit homes have different guidelines in some cases.

Borrower Requested Cancellation

So now that we know that the law requires your servicer to end PMI automatically when certain circumstances exist, what do you do when you realize that it could take years to get to a 78% LTV? You’ve probably heard that you can request a cancellation and demonstrate to the lender that your home has increased in value due to home appreciation in your area and/or that you’ve done improvements to the home that have increased its value. You basically have two options at this point:

  • Original Value. When your loan balance reaches 80%, or is scheduled to reach 80%, of the home’s original value (the price you paid for the home or the appraised value at the time you obtained the loan being refinanced), you can make a written request to have PMI removed.
  • Current Value. This implies that an appraisal will be done to determine the current market value of the home. When this has happened, the borrower may request a cancellation of PMI at 80% of the value assuming that the loan has a 5-year seasoning, a cancellation at 75% of the value with a seasoning of between 2 and 5 years, and a cancellation at any time if the borrower can demonstrate that improvement to the home has increased its value to 75% or less.

Be Like Blondie

The moral of the story here is to call me if you have PMI on your current loan and are thinking about removing it to lower your payment. I’ll help you assess if it’s possible and also present alternatives where they may exist. In some cases, a refinance is actually a better option financially, but in all cases, the review will be insightful and make you aware not only of your options today but any future thresholds you may cross that could enable your terms to become more advantageous.

Private eyes are watching you, 

 

Robert J. Spinosa

Vice President of Mortgage Lending

Guaranteed Rate

NMLS: 22343

Cell/Text: 415-367-5959 Fax: 415-366-1590

rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960

Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283