After its virtual disappearance for several years, the 10 percent down payment mortgage financing are back in action.
Brendon has quoted a couple of instances where banks have started showing keen interest in rejuvenating the so-called ‘piggyback’ loans.
Piggyback Mortgage Loan Makes Re-entry
Piggyback loan is a strategy, whereby the homeowner makes a 10 percent down payment and gets a mortgage for 80 percent of the home’s value. The homeowner then takes out a second loan for the remaining 10 percent. Since no single loan exceeds 80 percent of the property’s value, private mortgage insurance isn’t required. The combined payment of the two loans may be less than the cost of a single mortgage plus PMI, especially since the interest on a piggyback loan may be tax-deductible.
According to Brendon, San Francisco-based RPM Mortgage has resumed its offer of ‘piggyback’ loans in the first quarter of 2013. These loans were discontinued at the height of the credit crisis in late 2007.
Similarly, Mortgage lender Tom Gildea of Prospect Lending confirmed that he is doing loans with as little as 5 percent down payment.
However, the 5 percent down payment mortgage financing are offered only with private mortgage insurance. Besides, these loans are offered only for conforming loans, where loan size is restricted to $417,000. Further, these loans are reserved for borrowers carrying excellent credit, verifiable income and little debt.
Before the mortgage crisis exploded in mid-2000’s, obtaining a mortgage loan was quite easy, with borrowers asked to pay hardly any down payment. The borrowers were able to get mortgage financing by merely stating their income level.
Bust Leading To Caution
After the credit crisis caused the collapse of several banking institutions, many lenders have started demanding a minimum of 20 percent down payment. However, borrowers were finding it difficult to fork out such a high percentage as down payment, with uncertainty looming both on the economy and employment front.
The above scary scenario led to a situation where borrowers had to sit on the sidelines for years, despite home prices and mortgage interest rates plummeting to historic lows.
The sentiment has, however, improved recently with people feeling confident about their jobs besides watching their 401(k) and stock portfolios climbing back to pre-2008 levels.
The improved sentiment in the mortgage financing market can be gauged from the performance of the mortgage giants. Last month, the American mortgage giant Federal National Mortgage Association (OTCBB:FNMA) announced that it will pay the Treasury Department $59.4 billion, after posting a record quarterly profit driven by rising home prices and declining delinquencies. The sister mortgage giant Federal Home Loan Mortgage Corp (OTCBB:FMCC) also recorded a net income of $4.6 billion and said it will pay the Treasury a $7 billion dividend for the quarter.
However, mortgage lenders are exercising caution before permitting borrowers to avail the 10 percent down payment for mortgage financing. For instance, RPM Mortgage has certain qualifying criteria for such 10 percent down payment loans such as the borrower having a credit score of over 700. Besides, borrower’s total monthly exposure towards housing, car, student loan, and credit card should not exceed 45 percent of their monthly income.
Points To Ponder Before Plunging To Avail Piggyback Loans
Though banks are showing increasing interest to offer the 10 percent down payment of mortgage financing, borrowers should be aware of the drawbacks involved in such options. For instance, by paying 10 percent down payment, if the home prices decline later, the borrower would end up in a situation where mortgage loan outstanding exceeding the market price of the property. Besides with limited equity, if the borrower decides to sell, the loan amount along with the cost of selling the property would cumulatively exceed the sale price, putting the borrower into a potential financial trap.
Thus, Brendon DeSimone suggests prospective borrowers to evaluate the pros and cons of 10 percent down payment option for their mortgage financing, before deciding to sign on the dotted line.
The Federal Housing Finance Agency’s 2012 report to Congress cautioned the credit enhancement provided by Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) with less than 20 percent borrower equity pose significant counter party risk to both the enterprises.