What is a piggyback loan?

This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer piggyback loans. Any information described in this article may vary by lender.

Quick insights

• A piggyback loan is a mortgage arrangement in which financing is spread over two separate loans.
• With a piggyback loan, financing may be arranged in different proportions, such as an 80/20 loan, which splits the mortgage in two.
• Seeking approval for a piggyback loan can be more complicated if you choose to pursue each loan with separate lenders.

If you’re planning to buy a home soon, you may be looking for ways to keep costs low. Using a piggyback mortgage structure can help you spread the financing for your home out across separate loans. This may help eliminate the need for a traditional down payment or private mortgage insurance.

In this article, we’ll describe how piggyback loans work, what credit score is needed for this type of mortgage and how to assess if this is a good solution for your financial situation.

Why use a piggyback loan?

A piggyback loan is a mortgage structure that uses two separate loans to spread out home financing and keep costs low for buyers. There are a few reasons why a homebuyer might consider this route:

• Avoiding a large down payment: Mortgage lenders typically require a down payment of 20% or more of the home’s value up-front. For many, a down payment of this size can drain one’s savings (reducing their safety net at a critical time) or pose a barrier to homeownership.
• Avoiding private mortgage insurance (PMI): Without a down payment of at least 20%, most lenders will require the purchase of PMI to offset their lending risk. From a lender’s perspective, any mortgage with a loan-to-value (LTV) ratio above 80% is considered a high-risk loan, and PMI provides assurance that the loan will be repaid. For a buyer, PMI can be a significant addition to monthly expenses, potentially adding hundreds of dollars on top of the cost of the mortgage payment itself.
• Avoiding a jumbo loan: When purchasing an expensive home that is above the conforming limit, buyers may consider a jumbo loan and must meet stringent criteria to qualify. A piggyback loan can be an alternative that helps break up financing into smaller loans that may be easier to qualify for, with lower fees and interest rates.

Common piggyback loan formats

Piggyback loans are typically referred to numerically, with the numbers adding up to 100% the home’s purchase price. The number represents the spread between the primary loan, secondary loan and, if applicable, down payment. Here are examples of how the spread could work.

80/20 loans

One potential configuration for piggyback loans is an 80/20 mortgage structure. In this arrangement, 80% of the home’s value is covered by a primary mortgage, and the remaining 20% is covered by a second mortgage (or “junior loan”). With an 80/20 loan, the entire cost of the home is financed without the need for a down payment or private insurance.

80/10/10 loans

With an 80/10/10 piggyback mortgage loan, 90% of the home’s value is financed over two loans, leaving 10% remaining for the buyer as a down payment. The primary mortgage covers 80% of the home’s value, with a 10% secondary loan. In this arrangement, the homebuyer pays a modest downpayment, while still avoiding private mortgage insurance.

Other piggyback loans

An 80/15/5 loan (with a 15% junior mortgage and 5% down payment) or a 75/15/10 loan (with a 15% junior mortgage and a 10% down payment) are also options. The numerical spread may continue to vary for individual lending situations depending on the borrower’s finances and lender’s terms.

How to get a piggyback mortgage

Getting a piggyback mortgage is not so different from seeking a traditional mortgage. The main distinctions lie in the depth of research required and effort needed to coordinate between multiple lenders. In most situations, however, it’s possible to pursue both loans with the same lender. Here are the main phases of pursuing a piggyback mortgage:

1. Research your options and seek pre-approval As you focus on lenders who offer piggyback loans, compare interest rates, terms and conditions for both the primary and secondary loans. If you like, you can consider seeking pre-approval as part of your research. There’s no limit to how many preapprovals you can have at once, and the preapproval process itself may provide useful information for your decision. The process may impact your credit.
2. Complete applications and coordinate with lenders As you finalize your choice, review your options, keeping your ideal budget and terms in mind. When you are ready to formally apply and gather your paperwork. If you are pursuing loans with separate lenders, ensure both lenders are aware of the piggyback arrangement. Documents at this stage typically include detailed tax returns, bank statements and employment verification.
3. Closing and finalizing your home purchase Once both loans are approved, you can proceed to the closing process, which includes signing all necessary paperwork for each loan. The loans can then fund the home purchase. Bear in mind, you may have to pay additional closing costs separately.

Approval criteria for piggyback loans

As with a traditional mortgage, approval for a piggyback mortgage will vary depending on each individual lender’s requirements. Because there are two loans involved with this type of mortgage, you will need to meet the qualifications for both loans. Criteria for approval may include:

• A minimum credit score of 620 (this requirement may be higher for the second loan)
• A favorable debt-to-income ratio (often 43% or lower)
• Verifiable income and employment history

Keep in mind, the interest rate and terms for each individual loan are likely to be different. In many cases, the second loan has a higher interest rate due in part to the lender’s perceived risk.

Advantages and disadvantages of piggyback mortgages

So, is a piggyback mortgage a good idea? Keeping your personal financial circumstances in mind, consider these potential pros and cons:

Advantages of piggyback loans

• Allows borrowers to avoid PMI
• Reduces the need for a large down payment
• Potentially lowers overall interest costs
• Increased purchasing power

Disadvantages of piggyback loans

• Two separate loans to manage
• The second loan may have a higher (or variable) interest rate
• More complex application and approval process
• Limited availability among lenders

In conclusion

Piggyback loans are a less common lending arrangement than traditional mortgages. In most cases, a piggyback loan is pursued to avoid a large down payment or avoid paying PMI. Those with piggyback mortgages then make monthly payments for two separate loans.

If you’re researching your options to buy a home on a budget, you may want to investigate FHA loans for first-time homebuyers or connect with a home lending expert.