Piggyback loans were the most popular means of financing amongst cash-strapped people, who were desirous of owning a home without making the requisite down payment. Private Mortgage Insurance (PMI) was next in order of popularity. Seller financing — in case of piggyback loans — also became popular as home prices continued to escalate.
Today, piggyback loans are much harder to come by, although some lenders are still willing to consider Private Mortgage Insurance (PMI). In addition to these options, eligible borrowers can avail zero down VA-insured loans and 100% USDA financing. Buyers, financing through state Housing Finance Agencies and certain non-profits, can use the $8000 tax credit for making the down payment on the secondary financing provided by the aforementioned entities for availing a FHA-insured home loan.
Although the premium is tax deductible, people often preferred piggyback loans to Private Mortgage Insurance, since the amount of insurance premium was generally more than the interest on piggyback loans. However, today PMI is the best bet for a person, who is keen on buying a house with no money down.
As per the guidelines issued by Freddie Mac and Fannie Mae, people, who intend to buy a home by availing a home loan are required to down pay 25% of the purchase price of the home. The remaining amount can be borrowed from a primary mortgage lender. However, the borrower can circumvent the 25% down payment by obtaining a second mortgage simultaneously. In other words, the primary mortgage lender provides a loan for 80% of the purchase price, and the second mortgage lender, the remaining 20%. Here, both mortgages are secured with the same underlying house as collateral. The second mortgage piggybacks on the primary mortgage and carries a much higher rate of interest than the primary mortgage.
Traditionally, piggyback loans were 80-10-10, 80-15-5, or 75-15-10 loans. The first figure from the left indicates the percentage of the purchase price funded by the primary mortgage lender, the second figure is the percentage funded by the second mortgage lender, and the final figure is the borrower’s skin in the game. In time, the final figure was reduced to zero and resulted in no-money-down home loans. Thus, the borrower could easily buy a house with no money down. The second mortgage that piggybacked on the primary mortgage was typically provided by the primary mortgage lender, who gained in terms of higher interest rates than those charged on the primary mortgage. In some cases, the second mortgage was provided by the seller/owner of the house. This brings us to the concept of seller financing.
Although 100% seller financing is a thing of the past, it may be possible for an aspiring homeowner to down pay less than 20% and still buy a home, if the seller is desperate to get rid of the house.