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10/10/80 Loans and Down Payments

CenterSite Updated: Jun 15th 2016

Regardless of the type of mortgage that you get when buying a home, you are typically expected to come up with at least a 20% down payment in order to secure the loan and the house. For example, if your home costs $250,000 you are often expected to come up with $50,000 in cash to give to the mortgage company so as to secure your loan. This is a substantial amount of money! The average person needs to save for years to accumulate such a sum. There are other options available however. These other types of loans are variously referred to as non-conforming, sub-prime, 10/10/80, or piggyback loans. Whatever the reference used, they all function the same way. The home buyer can buy a home with as little as 10% down. The lender will issue a mortgage (of any type) to cover 80% of the purchase price of the home. The home buyer then gets a second loan to cover the remaining 10% of the purchase price. The interest rate on this second loan to cover the remaining 10% will typically be higher than the loan covering 80% of the purchase. This is because the lender of this second loan agrees to be less secure that the lender covering the 80%. Less secure means that if you default on the loans and your house has to be sold to repay the debt, the 80% lender gets their money first from the proceeds of the sale and the 10% lender gets their payment only if there is enough left. These types of loans are often used to avoid paying PMI (Private Mortgage Insurance; an expensive kind of insurance coverage that banks force you to pay on mortgages which are secured with less than 20% equity), but you have to be careful as you may end up paying more in interest than if you had a mortgage with PMI.

Down Payment and Down Payment Assistance

Most lenders require that a home buyer pay a portion of the purchase price of a home at closing. This is called a down payment, and it decreases the likelihood that the homeowner will default on the loan. The down payment required for a conventional loan is usually 20%. Many lenders, however, offer loans with smaller down payment requirements. So, what does you do if you do not have 20% to put down? Besides asking relatives and friends for assistance, you can look into down payment assistance programs. These are gift programs that aid home buyers by donating 1-7% of the purchase price. Generally, there are no income restrictions but there are caps on the maximum purchase price for the home.

FHA/VA is a government program available to lower income people (FHA) and military veterans (VA) which helps these people to purchase homes with a much lower down payment than would otherwise be possible (typically 5% of the purchase price). FHA/VA assistance is not technically down payment assistance as are the above mentioned programs but can be useful in overcoming down payment hurdles if you qualify.

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