80-10-10 mortgages

Question,
My wife and I are first-time buyers looking to purchase a two-family home in Chatham, N.J., for $580,000. We would like to put down 10 percent, and finance the rest using an 80-10-10 plan. Can we use an 80-10-10 plan for this size of a loan?
Regards,
B.C. Bungalow

Dear B.C.,
An 80-10-10 loan is where you get a first mortgage for 80 percent of the purchase price and at the same time borrow an additional 10 percent as a second mortgage. The last 10 percent is your down payment.

Since the primary mortgage lender isn't lending more than 80 percent of the home's value, private mortgage insurance (PMI) isn't required. The idea is that the savings on mortgage insurance premiums more than offsets the higher interest rate and additional costs associated with taking out a second mortgage.  

Make sure that it's worth your while to go through these additional gyrations. PMI isn't forever, and the second mortgage will typically be paid off over 10-20 years vs. the 30-year first mortgage. Make your lender or mortgage broker lay out the costs of a 90-10 mortgage and an 80-10-10 loan program. This worksheet from Realtor.com should help you with the analysis.

Since you're looking for both a jumbo loan (a first mortgage of more than $300,700) and an 80-10-10 loan program, you may be better off shopping for a loan with a mortgage broker rather than going to individual lenders on your own. Michael Larson's feature on mortgage brokers is worth reading, especially to learn the five steps to finding a good broker.

As first-time homeowners, you'll need a strong credit history and good income to qualify for these loans. It would be worth your while to review your credit report and even get a copy of your credit score.

All of the consumer reporting agencies offer to provide you your credit score, but TransUnion includes your credit score in with the price of your credit report, for $9. (Free in some states.) Review your credit report for inaccuracies and dispute any erroneous information.