HELOC Piggyback 2nd Trust Mortgage

Getting a 2nd trust mortgage when you bought a home was something I had never heard about when I got in the mortgage business in 1986. This is called a “Purchase Money 2nd trust.” I’d always thought a 2nd trust was something you got when you lived in a property for a long time and had built up a lot of equity (i.e. an equity line). For example when you wanted to tap the equity for home renovations or debt consolidation. However, 2nd trusts to help purchase a new home became common in the real estate boom of the early 2000’s and lasted as long as the boom did.

There were 80-10-10’s, 80-15-5, 80-20’s and even 125’s! What do these numbers mean:

80-10-10’s

This loan structure is where a homebuyer would borrow 80% of the sales price in a 1st trust mortgage, 10% of the sales price in a 2nd trust mortgage, and then the homebuyer would do 10% down payment.

80-15-5

This loan structure is where a homebuyer would borrow 80% of the sales price in a 1st trust mortgage, 15% of the sales price in a 2nd trust mortgage, and then the homebuyer would do 5% down payment. Interest rates would be a little bit higher since there was less equity in this scenario.

80-20’s

This loan structure is where a homebuyer would borrow 80% of the sales price in a 1st trust mortgage, 20% of the sales price in a 2nd trust mortgage, and then the homebuyer would have 0% down payment. The interest-rates would be correspondingly higher since this was a relatively risky loan.

125’s

Yes, there was even a period of time when banks were lending up to 125% of the value of the property! So if you bought a $100,000 property, you would get a $125,000 loan. No comment.

When the real estate boom ended with a crash these loans went away very quickly. The losses were large from these sorts of mortgage instruments. But purchase money 2nd trusts have started to come back into the marketplace, carefully and more conservatively. They serve a purpose if used in the right scenario.

Some homebuyers may use a 2nd trust to avoid mortgage insurance. And some homebuyers may use a 2nd trust to avoid taking out a Jumbo mortgage. There are other ways to avoid mortgage insurance such as a Lender Paid Mortgage Insurance (LPMI) option. Make sure to talk to your lender about all of the options. Below is information about how this mortgage product may look:

Purpose:

A Purchase Money HELOC can only be used to assist you in buying a home. The full credit line amount is drawn upon at the time of closing and interest begins to accrue from day one. It cannot be used as a standalone equity line of credit to draw out available equity on a property already owned.

Maximum Combined Loan-To-Value (CLTV):

The maximum CLTV for this product is 90%. CLTV is the amount of 1st trust mortgage plus the amount of the 2nd trust purchase money HELOC as a percentage of the sales price. This cannot exceed 90% which means you have to have at least a 10% down payment.

Maximum loan amounts:

$150,000 is the maximum line of credit for CLTV’s greater than 80%. $250,000 is the maximum line of credit for CLTV’s less than 80%. For CLTV’s greater than 80%, this means if you have a 10% down payment you cannot have a line of credit over $150,000.

Occupancy Requirements:

The home being purchased must be the primary residence for all borrowers. Homes purchased to be second homes or rental properties are not allowed.

Eligible property types:

Eligible property types for this product are single-family detached homes, townhouses, condominiums, and duplex units purchased as your primary residence. Mobile homes and manufactured homes are ineligible.

Credit Score:

All lines of credit are subject to credit approval and a minimum credit score of 700. Additional terms and conditions may apply depending on the type of home you are purchasing.

Debt-To-Income:

To qualify, the percentage of your monthly gross income that goes toward the payment on the 1st trust mortgage, the qualifying payment on the HELOC, plus payments on all other debts cannot be greater than 40%. The qualifying payment on the HELOC is 1% of the line of credit amount.

Down payment:

The funds needed to meet your down payment requirement cannot be borrowed. This includes borrowing against any 401K retirement plan you may have.

Interest Rates:

The line of credit has a variable rate feature. And the annual percentage rate and minimum monthly payment can change as a result. The annual percentage rate (APR) is based on a value of an index. The index is the highest rate published as the “Prime Rate” in the “Money Rates” table of The Wall Street Journal. To determine the rate on your HELOC many lenders use the value of the index and add 1.99% to it, known as a margin. If the index changes later so do the interest only payments. However, the maximum APR that can apply can be 18%.

Click Here To See a “History Of Prime Rate” Chart

Other Features:

There is usually no prepayment penalty to pay off the loan early. There are often times no application fees, points, or annual maintenance fees to open and maintain the line of credit.

Terms and Repayment

The term is usually 30 years. The first 10 years is known as the draw period. During this period the minimum payments are interest only. Once the draw period ends you must repay the outstanding balance over the remaining 20 years. This is known as the repayment period. During the repayment period you must make principal and interest payments.

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