Which Lenders Offer Piggyback Loans?

A piggyback loan is a financing strategy that involves securing two separate mortgage loans simultaneously to purchase a home. This approach typically combines a larger primary mortgage with a smaller second mortgage, often a home equity loan or a home equity line of credit (HELOC). The primary goal of this setup is frequently to avoid private mortgage insurance (PMI) by keeping the first mortgage at 80% or less of the home’s value, even with a modest down payment. It can also help borrowers finance a property without needing a jumbo loan, which often carries stricter requirements.

Types of Institutions Offering Piggyback Loans

Several types of financial institutions offer piggyback loans, each with distinct characteristics that may appeal to different borrowers. Traditional banks, including large national institutions and smaller community banks, are common providers. National banks often offer a wide range of mortgage products and may provide both the first and second mortgages, potentially streamlining the application process. Community banks might offer more personalized service and local market expertise.

Credit unions operate as not-for-profit financial cooperatives, meaning they are owned by their members. This structure often translates to competitive interest rates and lower fees compared to traditional banks. Credit unions typically prioritize member service and may offer flexible terms for piggyback loans.

Mortgage lenders, also known as mortgage companies, specialize exclusively in home loans. These entities can be either direct lenders or mortgage brokers. Direct lenders underwrite and fund their own loans, offering a direct line of communication throughout the process. Mortgage brokers, conversely, act as intermediaries, connecting borrowers with various wholesale lenders. They can shop around for different loan products and rates on behalf of the borrower to find favorable terms.

Online lenders have emerged as a significant force in the mortgage market, providing a digital-first approach to loan origination. These platforms offer convenience and often have streamlined application processes, which can expedite the loan securing process. While they may not have physical branches, online lenders can offer competitive rates and a wide array of loan products, including options for piggyback financing.

Regardless of the institution type, it is common for the second mortgage in a piggyback arrangement to be structured as either a home equity loan or a home equity line of credit. Home equity loans provide a lump sum with a fixed interest rate, while HELOCs offer a revolving credit line with a variable interest rate. Some lenders may offer both the primary and secondary loans, potentially simplifying coordination, though borrowers can also secure loans from separate lenders.

Lender Evaluation Criteria for Piggyback Loans

Lenders assess a borrower’s financial health using several criteria to determine eligibility for a piggyback loan. A strong financial profile helps demonstrate the ability to manage multiple loan obligations.

A strong credit score is a primary indicator of a borrower’s creditworthiness. While some lenders may consider scores as low as 680, a credit score of 700 or higher is generally preferred for piggyback loans. The second mortgage, which is typically a home equity product, may require a credit score of 680 or higher, which is often more stringent than the 620 minimum for a conventional loan.

The debt-to-income (DTI) ratio is another important metric, calculated by dividing total monthly debt payments by gross monthly income. Lenders typically prefer a DTI of 36% or less, including payments for both the first and second mortgages. Some lenders may accept a DTI up to 43%, but a lower ratio signals a greater capacity to handle additional debt.

The combined loan-to-value (CLTV) ratio is particularly relevant for piggyback loans, as it measures the total amount of all secured loans on a property against its appraised value. For an 80/10/10 structure, the CLTV would be 90% (80% first mortgage + 10% second mortgage), assuming a 10% down payment. Lenders use CLTV to gauge the overall risk, as a higher CLTV means less equity in the property.

Lenders also scrutinize employment and income stability to ensure a consistent ability to repay the loans. This typically involves verifying a two-year work history and documenting income through tax returns, W2s, and pay stubs. Stable employment demonstrates a reliable income stream to support both mortgage payments.

The type and condition of the property can also influence a lender’s decision. Lenders evaluate the property’s value and its alignment with the requested loan amounts. Additionally, financial reserves, such as liquid assets, may be required to cover a certain number of months of mortgage payments. This provides a buffer in case of unexpected financial challenges.

Steps to Secure a Piggyback Loan

Securing a piggyback loan involves a structured process that begins with thorough preparation and continues through application and closing. The initial step involves extensive research and comparison of lenders offering piggyback loans. Borrowers should explore various options, including traditional banks, credit unions, and mortgage companies, to compare interest rates, fees, and terms for both the primary and secondary mortgages. Engaging with different lenders can help identify the most competitive offerings.

Following initial research, obtaining pre-qualification or pre-approval from potential lenders is advisable. Pre-qualification provides an estimate of how much a borrower might be able to borrow, while pre-approval involves a more detailed review of financial information and results in a conditional commitment from the lender. This step helps set realistic expectations and strengthens a borrower’s position when making an offer on a home.

Gathering all required financial documents is a crucial preparatory phase before formal application. Lenders typically request detailed tax returns, recent pay stubs, and bank statements to verify income, employment, and assets. Having these documents organized and readily available can significantly expedite the application process.

Once a suitable lender is chosen and documents are prepared, the formal application for both the primary and secondary loans can be submitted. If pursuing loans with separate lenders, it is important to ensure both lenders are aware of the piggyback arrangement. The application package will undergo an underwriting phase where lenders assess all provided information and conduct property valuations.

During underwriting, lenders may request additional documentation or clarification, and prompt responses are important to keep the process moving forward. Upon approval, the loans proceed to the closing process. This final stage involves signing all necessary legal documents for each loan and paying closing costs, which can be incurred for both the first and second mortgages. The loans are then funded, and the home purchase is finalized.