Lenders have their own internal lingo, not unlike any other industry quite frankly. There are acronyms everywhere such as PMI, DTI and LTV just to name a few. Lenders are also known to have assigned nicknames or other terms that at first glance might have some scratching their heads. One of these terms used quite frequently in the mortgage business is “piggyback.” What is a piggyback loan and what is its function?
A piggyback refers to a mortgage loan that “piggybacks” on another. In the lending business it means there are two mortgage loans, a first lien and a second. This is also known as a “combo loan” When there are two loans used to finance a single purchase the first lien has a priority over the second. This means when the property is ultimately sold and there are two mortgages that must be paid off, the first and second, the first mortgage will be paid off and the second mortgage with any remaining funds.
For example, an owner has a home selling for $450,000 and there is a first mortgage at $360,000 and a second mortgage just under $45,000. After subtracting closing costs of $5,000, there is $40,000 net that goes to the seller.
Now however if the sales price is $375,000 with a $360,000 first and a $45,000 second, after closing costs and paying the first mortgage there remains just $10,000. The second lien cannot be paid off and remains on title. The property cannot transfer unless the second lien is paid. This is why interest rates on second mortgages are always a bit higher than one for a first mortgage due to the additional risk.
Why use a piggyback in the first place? It preserves the borrower’s cash. Instead of having to put down 20% in order to avoid private mortgage insurance, the buyers can put down just 10 or even 5%. Doing so keeps the first mortgage at 80% of the sales price with a second lien at 10% or 15% of the price of the home. In addition to preserving cash, the structure avoids PMI.
This financing option works for a conforming loan or a jumbo mortgage. A jumbo loan, one that is greater than the maximum conforming limit of $484,350, can also be used as a piggyback although not all lenders offer this unique program for jumbo transactions. Most every lender around can offer a piggyback option for a conforming loan but fewer have access to a jumbo piggyback, especially with just a 5% down payment.
Standard qualifying guidelines apply to the jumbo piggyback and really aren’t all that much more difficult to qualify for compared to a conforming loan. Borrowers can be expected to have good credit with a minimum credit score of 680 and must have demonstrated a stable employment history showing at least two years employed. Borrowers will also be asked to provide copies of their most recent pay stubs covering a two month period along with their two most recent W2 forms.
For those who are considered self-employed or rely on income other than from an employer must provide their two most recent signed and filed federal income tax returns along with a prepared year-to-date profit and loss statement. Jumbo loan guidelines ask that self-employed income be consistent from year to year as well as coincide with the P&L. Read more about all the Jumbo Purchase criteria here.
Homebuyers nationwide can contact us with questions by calling ph: 800-962-0677. We are available to assist you 7 days a week.