They're Baaaack: Combo Loans Return

It’s déjà vu all over again. “Piggyback loans” are readily available once again to home buyers, but not in the form that allowed many borrowers to buy homes with no money down before the housing crash. These mortgages are essentially a two-loan package — one “piggybacks” on the other to go toward the purchase price.

(As an aside, we must go back as far as the year 1564 or thereabouts to understand the origin of the word “piggyback.” Back in the 16th century, goods were transported in packs that people carried on their own backs or on the backs of animals. To be sure, pigs were NOT one of those beasts of burden but the term used to describe this was “pick pack” because you would pick up a pack in order to carry it on your back. “Pick pack” eventually became “pick-a-pack” which became “pick-a-back” though the insertion of the “a” apparently caused a problem and thus it morphed into “piggyback”. You’re welcome.)

Recall that during the recent heyday of the housing market, piggyback, or combination, loans were commonly available as what were known as” 80/20’s.” A home buyer got a first mortgage for 80 percent of the purchase price, then a second, subordinate mortgage from the same or a different lender to count as a 20 percent down payment. This relieved the buyer of the cost of private mortgage insurance, which is generally required when borrowers are financing more than 80 percent of the home’s price.

After the housing market went ‘there’ (See: hand basket; mode of transportation) and values plummeted, many piggyback borrowers found themselves with negative equity. And those who defaulted often had trouble obtaining a loan modification or approval of a short sale.

Today, however, these piggyback loans are more difficult to qualify for and limited to 90 percent loan-to-value (LTV). In other words, the borrower must put up at least 10 percent. They are often marketed as “80/10/10’s,” with the last 10 representing the down payment.

Many of the programs are aimed at borrowers who tend to have higher net worth and seek what’s termed a “jumbo” loan. Jumbo, or nonconforming loans, are mortgages that exceed the loan limits set by Fannie Mae and Freddie Mac. (The 2015 single-family limit is $625,500 in San Mateo County.)

According to some experts, jumbo borrowers may choose to add a second mortgage rather than roll all the debt into the first, because they can get a lower interest rate on the first if they finance 80 percent or less. While the rate on the second loan will be higher, they have the ability to pay it off over a relatively short period of time, leaving them with only the lower-priced loan.

But the experts also caution that just because piggyback is back, borrowers should not assume an “80/10/10” will be cheaper than a loan requiring mortgage insurance. They should consider paying the insurance upfront, by financing it into the rate, which can lower the monthly payment