Piggyback Mortgage: Buying a Home in California With Less Money Down

Did you know it’s possible to use two mortgage loans when buying a home in California?

It’s called a “piggyback” mortgage strategy, and it could help you minimize your down payment while avoiding private mortgage insurance at the same time.

1. A piggyback mortgage uses two loans (called a first and second mortgage) to buy a home with a smaller down payment.
2. This strategy can help buyers avoid private mortgage insurance (PMI), which is often required for down payments under 20%.
3. Common versions include the 80/10/10 and 80/15/5, where the buyer covers part of the purchase with a second loan and a smaller cash down payment.
4. The piggyback strategy is commonly used in high-cost markets like California to avoid jumbo loans and their stricter requirements.
5. While it may lead to higher interest costs over time, it can significantly reduce the upfront out-of-pocket expenses for home buyers.

Using a Piggyback Loan to Buy a Home in California

Most California home buyers use a mortgage to help finance their purchases. And most of those folks use only one mortgage loan.

But some people choose to take out a second one as well.

You might wonder why someone would need or even want a second loan. It’s just more hassle, right? More paperwork and payments to keep up with?

Actually, this strategy can be beneficial in the right circumstances — especially for borrowers who cannot afford to make a 20% down payment.

The Three Primary Components

There are different ways to combine or “piggyback” a first and second mortgage. The most common strategy involves using the following three components:

1. A first mortgage that covers the bulk of the purchase
2. A second loan that covers a smaller percentage of the purchase price
3. A down payment that covers the remaining amount (typically 5% – 10%)

This strategy tends to be more common in California’s pricier real estate markets, including the San Francisco Bay Area and Southern California.

Example: The 80/10/10 Mortgage Strategy

This will make more sense with a real-world example. Let’s take a look at the 80/10/10 piggyback mortgage scenario.

In this situation, a home buyer takes out a first mortgage amounting to 80% of the purchase price. They also use a second loan for 10% of the price. (It “piggybacks” on the first mortgage, hence the name.)

But we’re not there yet. The two home loans add up to 90% of the purchase price. There’s another 10% remaining.

The home buyer makes a down payment to cover that last 10%, bringing them up to a full 100% of the purchase price.

There are other variations of this strategy as well. The 80/15/5 piggyback mortgage is another example. In this case, a California home buyer uses two loans for 80% and 15% of the purchase price, with a down payment for the remaining 5%.

1. It allows you to buy a house in California with less money down. That’s especially important in the state’s pricier markets, like San Francisco, Los Angeles, etc.
2. It allows you to avoid paying private mortgage insurance, or PMI. In some scenarios, this could save a borrower hundreds of dollars per month.
3. It provides an alternative to using a jumbo loan to buy a home in California. Jumbo mortgages have stricter qualification requirements.

It Allows You to Make a Smaller Down Payment

For a lot of home buyers, the down payment is the biggest obstacle to homeownership. This is especially true in California, where the median home price is approaching $800,000.

So the idea of reducing or minimizing the down payment can be appealing to some borrowers. The first and second mortgage strategy is one way to accomplish that goal.

• Couple #1 wants to buy a house in California that costs $700,000. They make a down payment of 20% and borrow the remaining 80%. Their out-of-pocket expense would be $140,000, just for the down payment.
• Couple #2 are also purchasing a home in California for $700,000. But they use the 80/10/10 piggyback strategy. They take out one loan for 80% of the purchase price ($560,000) and a second mortgage loan for 10% ($70,000). They make a down payment for the remaining 10%, which comes to $70,000.

Couple #2 have essentially cut their down payment in half, when compared to the first scenario. They accomplished this by using a first and second mortgage loan combined.

Granted, couple #2 are also financing a bigger portion of the purchase price. So they’ll probably pay more in interest over time. But they have greatly reduced their upfront expense.

Avoiding Private Mortgage Insurance (PMI)

Using a first and second mortgage to buy a home in California also allows borrowers to avoid paying for private mortgage insurance, or PMI.

PMI is usually required for loans that account for more than 80% of the home’s appraised value. If the loan-to-value (LTV) ratio exceeds 80%, private mortgage insurance will probably be required.

This can increase the size of your monthly payments, because mortgage insurance premiums are usually rolled into the monthly mortgage payment.

Granted, PMI does offer some benefits. It allows home buyers in California to purchase a home with a smaller down payment, shortening the path to homeownership.

But it also increases total borrowing costs, which is why some home buyers try to avoid it. The piggyback mortgage strategy allows borrowers to make a relatively low down payment, while avoiding PMI.

An Alternative to Jumbo Loans in Pricey Markets

Piggyback mortgage loans also provide an alternative to using a jumbo loan in California.

• A “jumbo” loan is one that exceeds the government-issued conforming loan limits for the county where the home is located.
• A “conforming” mortgage product, on the other hand, is one that falls within those size limits.

Conforming loans can be sold into the secondary mortgage market, via Fannie Mae and Freddie Mac. Jumbo loans cannot be sold into the secondary market. Instead, they are commonly sold to private investors.

Jumbo loans bring more risk for lenders, due to their size and the fact that they cannot be sold into the secondary market. So they often have stricter credit score and down-payment requirements than their smaller counterparts.

Some borrowers use the piggyback mortgage strategy to avoid crossing into jumbo territory. They do this by splitting the financing between a first and second loan, with neither accounting for more than 80% of the home value.

Ready to Explore Your Options?

Are you in the market to buy a home in California? Does the idea of a smaller down payment appeal to you?

If so, a piggyback mortgage strategy might work for you. But you have other options as well, and they’re all worth considering.

As a broker, Bridgepoint Funding works with multiple lenders. This gives us access to a broader range of home loan products, some with flexible down payment requirements.

Please contact us if you have questions about these options or would like to apply for a loan.