Which is the term used when a borrower obtains 100% financing through the same lender utilizing both a primary and secondary mortgage? Question 2 options: a) FHA b) Conventional c) Piggyback d) USDA
The correct answer and explanation is:
Correct Answer: c) Piggyback
A piggyback loan (or piggyback mortgage) is a financing strategy where a borrower obtains 100% financing by taking out two loans simultaneously from the same lender or coordinating lenders. Typically, the first mortgage covers 80% of the home’s purchase price, and the second mortgage covers the remaining 20%. This method allows the borrower to avoid a down payment and private mortgage insurance (PMI), which is usually required on conventional loans when the down payment is less than 20%.
There are several common piggyback structures, such as:
- 80/20 loan: The first mortgage is for 80% of the home’s value, and the second is for 20%.
- 80/10/10 loan: The first mortgage covers 80%, the second mortgage 10%, and the borrower makes a 10% down payment.
Benefits:
- No PMI: Since the first mortgage is limited to 80%, borrowers avoid the cost of private mortgage insurance.
- Lower down payment: The borrower doesn’t need to come up with a large upfront payment.
- Better interest terms: Sometimes the combined rates can be more favorable than a single high-LTV (loan-to-value) loan.
Risks:
- Higher total interest: Second mortgages often carry higher interest rates.
- Complexity: Managing two loans can be more complicated.
- Qualification: Lenders may have stricter credit or income requirements for piggyback loans.
This strategy became popular in the early 2000s but saw a decline after the 2008 housing crisis due to the increased risk to lenders. Today, it is still used, particularly by borrowers with strong credit who want to avoid PMI without using a large down payment.
Other answer choices:
- FHA: Offers low down payment loans but requires mortgage insurance.
- Conventional: Refers to standard loans not backed by government programs.
- USDA: Offers 100% financing for rural properties but is a government-backed program, not a piggyback loan.