Many mortgage companies require you to put a sizable down payment of at least 20% on homes you plan to purchase. Since the failure of so many subprime loans, the decline in housing values and the economic downturn in the US, this requirement has become even more stringent. Previously, especially when housing prices were high and the housing market was booming, people might be able to take out what is called an 80/20 mortgage.
The 80/20 mortgage means the borrower actually take out two loans. Other names for this mortgage include piggyback loan and 100% financing loans. One loan is for 80% of the money borrowed and the other loan is worth 20%, essentially what would be paid in a down payment. Loans may be offered through different companies, which means the borrower can be responsible for making payments to two different companies and for paying closing costs on two loans. Some lenders offered 103% financing which helped to meet theses costs.
One of the reasons to take out an 80/20 mortgage instead of asking for 100% financing from a single company was that it allowed borrowers to avoid paying huge amounts in private mortgage insurance (PMI). PMI could easily add several hundred dollars per month to mortgage payments, and taking out a second 20% loan might actually be cheaper than borrowing 100% from a single company.
There are a number of mortgage companies that no longer offer first and second mortgage options due to the increased foreclosure rate and the economic downturn. Moreover, these loans were usually only offered to people with excellent credit and there has been some changes in what lending industries now consider good credit. Some companies may offer 80/10/10 plans instead of 80/20 plans. The borrower must put down 10%, and take out two loans for 80% and 10% of the value of the home.
One issue that has been plaguing many homeowners with first and second mortgages is what occurs if they lose their homes in foreclosure. Since the 20% of the 80/20 mortgage was taken out as a form of insurance on the other 80%, the second mortgage may still be owed. The lender with the 80% mortgage usually has the right to collect by selling your home to someone else, but since it’s unlikely they’ll make a profit, they won’t be repaying your second mortgage of 20%.
This can mean that the second mortgage company can ask the borrower to repay what is owed to them. People with 80/20 mortgage arrangements need to understand their continued debt obligations, which may be determined by state or country law, when they lose a home in foreclosure. Some people do need to declare bankruptcy in order to resolve this matter.