An “ 80/20 zero down mortgage” is 100% financing in the form of two loans. One loan is at 80% loan-to-value (LTV) and the other is called a piggy back second at 20% LTV. The 2nd mortgage is really to avoid mortgage insurance and impound accounts with the payment.
In order for one to qualify for this type of loan you must meet minium credit scores, have reserves, established credit holder with 24 months history or longer, employment and residence history. If you are considering using this type of financing program you need to sit with a Mortgage Planner to calculate your debt-to-income ratios (DTI). In order for you to qualify for an 80/20 program your DTI must be below 50% on the 2nd. If not you cannot qualify for this type of loan.
Let’s say you can qualify for this loan based on the DTI and guidelines for this financing and you have enough money to put a down payment on the house. If this is the case you might want to sit with both a mortgage planner and financial planner who can advise you. Keeping liquidity on your money will increase safety for your household. If you allocate that money in a high yield investment, it will increase your rate of return allowing you to increase your net worth and potentially achieve financial freedom earlier. Freedom point is the point where your assets will exceed your liabilities. A Mortgage Plan will guide you to your financial and investment plans.
I know you are probably asking yourself if you don’t put money down you will not see a rate of return on your investment. There is no rate of return on equity. Besides, if you put those monies down, they may be difficult to get back if an emergency requires the money. You can also potentially lose the money if economic conditions affect house values.
This is a topic you should really consider when debating to purchase 100% financing as an 80/20 combo.
A 20-80is actually called an 80/20 in mortgage terms. This is a way of purchasing a home with 100% financing, but avoiding what is called “PMI” or Private Mortgage insurance. You get 2 loans…the 1st one is for 80% of the sales price and the 2nd is for 20% of the sales price, thus, you have to pay nothing down. You only pay for the closing costs or out of pocket expenses. The first loan usually has a better interest rate than the 2nd, but if you have good budgeting, you can sometimes payoff the 2nd before it is due and increase your equity in your home quickly. If your credit is good and the market is on the rise, you can refinance both loans into one loan at a later date.