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

Did you know it’s possible to use a first and second mortgage loan to buy a home in California? It’s true. And in some situations, this kind of strategy can work to the borrower’s advantage?

But what does it mean to use a first and second mortgage? How does it all work? And how can home buyers in California benefit from the “piggyback” financing strategy? Here’s what you need to know.

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 take out a second loan when buying a property in California.

You might wonder why someone would need or want a second loan. It’s just more hassle, right?

Actually, this strategy can be beneficial in the right circumstances. A combination first and second mortgage can help a person qualify for a higher loan amount, while avoiding the extra cost of private mortgage insurance (PMI). It can also reduce your down payment expense.

How it works: There are different ways to combine or “piggyback” a first and second mortgage. The most common strategy is when a home buyer uses a first loan to cover the bulk of the purchase, and a second loan for a smaller percentage of the purchase price. Then, the borrower pays the remaining amount in the form of a down payment.

This strategy tends to be more common in pricier real estate markets. And California has plenty of those! It allows home buyers to purchase a property with less money down, and to avoid PMI in the process.

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 California 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 common name for this strategy.)

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 / borrower makes a down payment to cover that last 10%, brining 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 to cover 80% and 15% of the purchase price, while making a down payment for the remaining 5%.

Now you know how this strategy works. But why would anyone use it? Why take on two loans instead of one?

There are three main advantages to this method:

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 the Bay Area and SoCal.
2. It allows you to avoid private mortgage insurance, or PMI. In some cases, this can save the borrower money over the long term.
3. It’s an alternative to using a jumbo loan to buy a home in California.

One Path to a Smaller Down Payment

For a lot of home buyers, the down payment is the biggest obstacle to homeownership. So the idea of reducing or minimizing the down payment can be appealing. The first and second mortgage strategy is one way to accomplish that goal.

Consider the difference:

• Home buyer ‘A’ wants to buy a house in California that costs $700,000. He makes a down payment of 20% and borrows the remaining 80%. His out-of-pocket expense would be $140,000, just for the down payment portion.
• Home buyer ‘B’ is also purchasing a home in California priced at $700,000. But she uses the 80/10/10 piggyback strategy mentioned above. She takes out one loan for 80% of the purchase price ($560,000) and a second mortgage loan for 10% ($70,000). She makes a down payment for the remaining 10%, which comes to $70,000.

The second home buyer essentially cut her down payment in half, when compared to the first scenario. She did that by using a first and second mortgage loan.

Granted, she’s financing a bigger portion of the purchase price, and will likely pay more in interest over time. But she has also significantly reduced her upfront, out-of-pocket expense. So it’s a matter of priorities.

Avoiding Private Mortgage Insurance (PMI)

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

PMI is usually required for loans that account for more than 80% of the home’s appraised value. In other words, 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.

Related: A Borrower’s guide to California PMI

Some borrowers are okay taking on the added cost of PMI, because it allows them to buy a home with less money down. This appeals to California home buyers who cannot afford a 20% down payment. Many, if not most, borrowers in the state fall into that group.

Some home buyers use the piggyback mortgage strategy because it allows them to make a smaller down payment, while avoiding PMI.

Ultimately, you have to compare the monthly payment and total costs associated with both scenarios, to determine which one matches your goals. Every scenario is different, because is borrower is unique.

An Alternative to Jumbo Loans in Pricey California Markets

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 via Freddie or Fannie. Instead, they are commonly sold to private investors.

There is more risk associated with jumbo mortgage loans, since they cannot be sold to Fannie Mae or Freddie Mac. There’s also a higher amount being borrowed. As a result, jumbo loans tend to have stricter credit score and down-payment requirements than their smaller counterparts.

Some borrowers opt for the piggyback mortgage strategy, so they don’t have to cross into jumbo territory.

The point is, there’s a mortgage product for almost any situation. The key is to choose the best financing strategy for your unique situation. And that’s where we come in.

We can help! 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. We can show you different financing scenarios to help you choose the best path forward. Contact our knowledgeable staff today!