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80/10/10 Mortgage – Eliminate PMI and Increase Loan Limits

The 80/10/10 is Back!Wouldn’t it be great to increase the $625,500 loan limit without the need for a jumbo loan? You can!  The 80/10/10 loan is back. And it’s perfect for the Orange County, CA marketplace. This combo loan increases conventional loan limits and eliminates mortgage insurance. It also has other beneficial features, especially for high cost markets like Orange County.

The 2012 conventional loan limit for a single unit here  is $625,500. Yet many residents have the need for loan amounts in excess of the $625,500 loan limit. Any amount above that requires a jumbo loan. Jumbo loans are very different. Guidelines are stiffer, larger down payments are required and there’s a bump in interest rates.

Enter the 80/10/10 mortgage. What is an 80/10/10? It’s two loans. There’s a first loan consisting of 80% of the value and a second loan consisting of 10% of the value. The borrower brings in the remaining 10%.

Why is this so exciting? It opens up additional lending options that have been missing for a long time. Second loans were common until the market began to shift. In 2007, as delinquencies began to increase, the investors for 2nd loans began to feel the pinch. After all, a 2nd loan is in secondary position to the 1st loan. In the event of a default the second note holder gets paid after the first. If there aren’t sufficient funds available then the 2nd note holder loses their investment completely. There’s a considerable amount of risk involved.

With homeowners losing their homes in record numbers the investors for 2nd loans responded strongly. They increased their rates considerably, stiffened guidelines and reduced their LTV requirements. Some even withdrew from the market.

This left a gap for a segment of homeowners who were ready and willing to purchase a home but did not have 20% to use as a down payment. Around this time, the popularity of FHA loans exploded. FHA loans made up only 3.77% of total mortgage market share in 2006. Today, that percentage has increased over 400% and FHA’s market share in March 2012 stood at 16.05%.

Mortgage insurance filled the gap, especially on FHA loans. Initially mortgage insurance was rather cheap for an FHA loan. And since FHA did not require borrowers to qualify separately for mortgage insurance, it was real popular. But as FHA’s losses mounted, they too needed to compensate. They began by increasing their rates. Since then FHA has modified their mortgage insurance 5 times in 4 years. On April 1, 2012 they rose again. FHA borrowers now shell out up to 1.50% in annual mortgage insurance. This can be a hefty chunk of change to fork out each and every month, especially in markets such as Orange County, CA.

I don’t want to disparage FHA loans either. They have their place in this market. FHA loans are fantastic for those with low assets, tight debt ratios, credit challenges or extenuating circumstances. But for the purpose of this article, I mean to she light on the benefits of the conventional loan seekers.

Many 2nd loan investors are still reluctant to re-enter the market. They merely dip their toes in the water. But with this investor we now have a fantastic alternative for borrowers. Let’s look at some of the benefits of an 80/10/10 loan.

 Extends Conforming and High Balance Loan Limits

                Example: Let’s assume you wanted to purchase a $750,000 home in Orange County, CA. You could go with an FHA loan. The 2012 FHA loan limit in Orange County is $729,750. The conventional limit is $625,500. So, in order to avoid the additional expense of an FHA loan would require you to put down nearly $125,000. But now we can increase the mortgage loan limit. The first loan would match the conventional limit of $625,500. The 10% down payment from the borrower would be $75,000. And we would get a 2nd loan for $49,500. In this case we’ve extended the loan limit to $675,000. But we can extend it as high as $850,000.

Eliminate the Added Cost of PMI

In some cases, mortgage insurance is quite expensive. Let’s look at an example. We’ll assume an Orange County resident needs a base loan amount of $675,000. We can compare an FHA loan with a conventional loan. For the conventional loan we’ll use a $625,500 first loan and a $49,500 second loan.   

  •           The monthly mortgage insurance payment on the FHA loan is $858. We’ll add in the principal and interest payment of $3,177 and our combined monthly payment is $4,035.
  •         The 1st/2nd conventional loan looks like this. The principal and interest payment on the 2nd loan is $236. The P&I payment on the first is $3,032. The combined monthly payment is $3,268.

That’s a monthly savings of $767 and an annual savings of $9,204!!

Compensate for Low Appraisals

Consider this scenario. An Orange County, CA resident is refinancing a $600,000 loan and believes the value is $750,000. The appraised value comes back at $700,000. This means they went from 20% equity to 14% equity. What do they do? Adding mortgage insurance to a $600,000 loan is quite expensive. With a $50,000 2nd loan, they can avoid PMI and have a much smaller payment. This scenario applies to home purchases as well.

Eliminating Subjective Re-Subordinations

Instead of re-subordinating a 2nd, pay it off. Some homeowners who wish to refinance their property must re-subordinate their existing 2nd loan. This requires getting approval from the existing investor of the 2nd note. They request your financial documentation along with a copy of the appraisal in order to make a decision. If they choose not to re-subordinate your loan then you are unable to refinance your first loan. With this new program you can pay off your existing 2nd loan with a new 2nd loan.

Are the gears turning in your head now? Can you see how an 80/10/10 loan can benefit you? Increasing loan limits and eliminating mortgage insurance can get you the home that you want at a payment that you can afford.

Want to check your eligibility for this program? Do you have questions about FHA, VA, conventional or condominium financing? Contact me for more information or to get a quote.

Scott Storace

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