April 11th, 2016 5:41 AM by Jackie A. Graves, President
Michele and Kristian
Klein with their 6-month-old daughter, Kayla, in the home they bought with the
help of a piggyback loan. Credit
Jake Naughton for The New York Times
It was a
year of firsts: In 2015, Kristian and Michele Klein welcomed their first child,
a daughter, and bought their first home — a freshly renovated four-bedroom Cape
Cod in Glen Head, N.Y.
But instead of making a traditional down
payment of 20 percent — the magic amount often needed to avoid the added cost
of mortgage insurance—
they put down just 10 percent, still a significant sum, on their $685,000
house. Yet they managed to circumvent the insurance, saving more than $250 a
they do it? They took out one loan equal to 80 percent of the purchase price,
and another loan for 10 percent — something that has traditionally been called
a piggyback loan or a second mortgage.
prices on the rise in many parts of the country, coming up with 20 percent can
seem an insurmountable task for prospective homeowners of all income levels.
Last year, about 65 percent of all home buyers — or 1.9 million borrowers — put
down less than 20 percent, according to an analysis by Inside Mortgage Finance
that covered about 80 percent of all mortgages and excluded jumbo loans.
While most lenders require mortgage insurance
on loans with smaller down payments to
compensate for their extra risk, there are several options that do not. A few
new programs have become available postrecession, while some older strategies
have been resurrected, including the piggyback loan. All let borrowers avoid
the added monthly expense of insurance, which generally costs from 0.3 percent
to more than 1 percent of the loan amount annually. But borrowers may pay a
slightly higher interest rate instead.
mortgage insurance won’t always be possible. Nor will it always be the best or
most economical decision. But the good news is that prospective home buyers
have options, whether through a traditional bank, a credit union or a newer
said that having the extra cash on hand, rather than tied up in the house, gave
them a stronger sense of security, particularly with a new baby.
have some more wiggle room as opposed to giving and using all of your savings
for the home,” said Mr. Klein, 34, who works for a consulting firm that
represents publicly traded companies. “I would rather have the money in my
pocket to work with.”
percent down payment requirement is etched into the charters of both Fannie Mae
and Freddie Mac, which back or purchase most mortgages in the United States up
to $417,000 (or $625,500 in higher-cost areas). Home buyers who want to borrow
more than 80 percent need to buy insurance to protect the agencies, or another
party must provide it for them.
commonly, the borrower pays the insurance in the form of a monthly premium,
which must be automatically canceled once the mortgage balance reaches 78 percent
of the home’s original value (though homeowners can petition to have it dropped
once it reaches 80 percent).
from the Federal Housing Administration, however, continue to charge insurance
for the life of the loan.
lenders may pay for the insurance, though that generally raises interest rates
for the borrowers — perhaps by 0.375 to 0.5 percentage points, loan officers
said, depending on the borrowers’ credit history, their down payment and other
factors. The downside is that the rate is higher for the life of the loan,
unless the borrower refinances.
A new program from
Bank of America, in partnership with Freddie Mac and a group called Self-Help,
avoids the insurance altogether, even though it permits down payments as low as
3 percent. But there are some significant limiting factors. Families in the New
York area generally cannot earn more than $80,700, the area’s median income;
the mortgage amount cannot exceed $417,000; and interest rates are marginally
higher than those of traditional mortgages (but often better than other
At the opposite end of the spectrum is Social
Finance, the lender known as SoFi, which got
its start in student
loans. Eligible home buyers can put down as little as 10 percent on
amounts of up to $3 million — without mortgage insurance — though those loans
will command a slightly higher interest rate.
jumbo mortgage lenders, which generally make loans above Fannie’s and Freddie’s
limits of $417,000, are also providing loans with slightly smaller down
“Where we’ve seen the biggest change is in the
appetite of jumbo lenders in the private sector to allow for 90 percent
financing, which we hadn’t seen be this widespread since before the crash of 2007
to 2008,” said Mark Maimon, a vice president with Sterling
National Bank in New York, which acts as a lender that can also work with other
loan providers. Jumbo lenders sometimes require insurance, but not always,
since they aren’t selling their loans to the government agencies. But they may
require a marginally higher interest rate.
The Kleins made a 10
percent down payment on their home and managed to avoid the added expense of
mortgage insurance. CreditJake Naughton
for The New York Times
are the thousands of credit unions across the country that have a little more
leeway in offering low-down-payment loans without insurance, largely because
they keep their loans on their own books.
“They can listen to the story of the
borrower,” said Bill Hampel, chief economist and chief policy
officer at the Credit Union National Association. “That doesn’t mean they make
riskier loans, but they can balance loan requirements off one another. If they
are weak in one category but strong in another,” the credit union can still
make the loan, he said.
At CommunityAmerica Credit
Union, in Lenexa, Kan., for example, borrowers have several options. They can
put as little as 10 percent down using one loan without mortgage insurance, or
they can take an initial mortgage for 80 percent of the purchase price and a
second loan for up to 15 percent, similar to what the Klein family did. “We are
going to run the scenarios,” said Carrie O’Connor, chief lending officer. “You
need to look at each individual situation and evaluate it.”
or second mortgage — not to be confused with the versions misused during the
housing bubble, which permitted up to 100 percent financing — can take
different forms. The second loan may be a home equity line of credit, which
typically carries a variable rate that is based on the prime rate plus an
additional margin set by the lender. It generally requires only interest-only
payments, but adjusts to a principal and interest payment after 10 years.
(Fixed-rate second mortgages, say over a 20-year term, may be also available,
but rates are usually higher than the line of credit.)
line of credit can be a more economical option, even when factoring in
principal payments. But the buyers need to be disciplined about paying down the
principal. And there’s the risk of rising interest rates, which is a reason
some loan officers suggest using this option as shorter-term financing.
“This is a
great option for those borrowers that have high bonus or commission income who
eventually want to pay off the second mortgage down the road and end up with
just one mortgage,” said Deb Klein, a loan consultant at Caliber Home Loans in
Chandler, Ariz. Or they may be waiting for their previous home to sell, which
will free up cash to pay down the loan.
its costs into one interest rate and uses nontraditional means to vet
borrowers, forgoing credit scores and instead looking at something in plain
view: extra cash. SoFi requires income documentation for the last two years,
and it reviews prospective borrowers’ debt load in relation to their ability to
pay the debt under consideration. But SoFi likes to see at least $1,500 left
over each month after all debts, including the mortgage, are paid. “We don’t
focus so much on ratios as we do dollars of cushion,” said Mike Tannenbaum, who
oversees SoFi’s mortgage business. “We underwrite mainly on free cash flow.”
Armstrong, a corporate employment lawyer, and her husband, who works for a
software services firm, recently purchased a three-bedroom white stucco home in
the Easton Addition neighborhood of Burlingame, a costly market just outside
have two healthy incomes, a good portion of their assets is locked up in
privately held companies, so securing a jumbo loan for the home proved
challenging. But SoFi — which Ms. Armstrong said she learned about from a
billboard along Highway 101 — ultimately let the family make a down payment of
15 percent and charged a competitive interest rate of 3.75 percent. “It allowed
us to put a little less down compared to what the market trend was,” she said.
“And we didn’t need mortgage insurance.”
By TARA SIEGEL BERNARD -
To view the original article click here