Several of my clients are buying new construction homes. This sometimes put them in a unique situation because typically the builder wants to see a mortgage approval prior to starting to build their home. Some of my clients simply cannot afford to own two homes. So they have to sell their home and find interim housing. Some can afford two homes, but don’t want to. They move forward with the hopes their home will sell quickly, when their new home is nearly complete. I like to come up with plan A, plan B, and sometimes plan C for my clients in those situations. Of course, plan A, is to sell their home. But what about plan B and plan C?
One of those plans that I normally suggest is an 80-10-10. This option is available for all clients, not just new construction clients, but often works well for their situation in particular. So lets discuss what an 80-10-10 is.
To keep it simple, an 80-10-10 is two mortgages, a first and a second.
Most first mortgages will be 80% of the value of your home. This keeps your loan under the threshold for needing mortgage insurance.
Then your second mortgage will be 10% of the value of your home. This mortgage can be a loan or a credit line. It can also be a fixed or variable rate loan.
This number is the percentage that the client will need to use as a down payment.
Keep in mind, these numbers do not have to be an 80-10-10. For example, they could be a 75-15-10. The simple rule of thumb, is that the second mortgage cannot exceed the first. So the first number always has to be the largest.
So why would a client opt to do an 80-10-10?
- As long as the first mortgage is 80% of the value of the home, there is no mortgage insurance. This is a great benefit to the borrower when looking at their monthly figures.
- This would help a jumbo purchase price avoid strict jumbo underwriting criteria. Such as cash reserves and higher credit requirements.
- When doing a home equity loan for the second, the borrower will always have a line of credit available if they ever need it, even once they pay it off.
- Going back to our first scenario, for new construction clients, or any clients purchasing a home prior to the sale of their current home, they can use it as a bridge mortgage. Once they sell their current home they can pay the 2nd off completely.
All those benefits do not come without some risk. Generally, these 2nd mortgages are interest only for the first 10 years. Which means that your payment will increase to include paying down your principle. Additionally, the rate is typically adjustable with what the prime rate is as the time. And of course, until it is paid off you will have two payments – your first and your second.
An 80-10-10 is a good option to consider for many buyers. If you wanted to see some numbers and comparisons to help make your decision, please let us know.