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MortgagePoint ยป Your Trusted Source for Mortgage Banking and Servicing News 52 September 2024 J O U R N A L 'PIGGYBACKED' PURCHASE LOANS REACH NEW HIGHS H omebuyers who are purchas- ing for the first time and have low to moderate incomes are disproportionately affected by elevated mortgage rates and home prices, accord- ing to a new CoreLogic study. Rising property values, cripplingly high interest rates, and two years of rising inflation are pushing more and more homebuyers to take out expensive second mortgages. This is particularly true for people who are the least able to finance a home. However, "piggyback loans" offer aspiring buyers another option to become homeowners. Buyers Explore Piggyback Loans Amid Affordability Constraints What is a piggyback loan? In addition to the primary mortgage on the home, a piggyback loan is a supplementary loan taken out by buyers. These tiny home equity loans, also known as home equity lines of credit (HELOCs), are a popular choice for cash-strapped buyers who need assistance with closing expenses or obtaining financing for a down payment. Conventional loans that are piggybacked are frequently referred to as "80-10-10" loans, in which the borrower combines a 10% piggyback loan with a 10% cash down payment. Despite the advantages, secondary loans of this kind do not come without their fair share of problems. Compared to a primary mortgage, these loans are typically more expensive and have higher Lending/Originations interest rates. Borrowers on these loans will also probably have to pay additional origination or closing costs. Homebuyers Fuel Growing Popularity of Piggyback Financing Following a sharp increase in mortgage rates in the middle of 2022, more FHA-dependent homebuyers have turned to additional piggyback lending for support. Low-to-moderate income families and first-time homebuyers, who frequently cannot meet traditional down payment criteria or have insufficient credit history to qualify for conventional loans, are drawn to FHA loans. For FHA borrowers, the percentage of piggybacked house purchases has historically been greater. 9.8% of all FHA purchase-loan volume was made up of piggybacked transactions as of 2017. A second loan that was backed by someone else was present in 3.8% of traditional purchase loans. At the end of 2019, the percentage of conventional purchases piggybacked on FHA purchases was 3.2%, compared to 13.8% for FHA pur- chases. The percentage of piggybacked FHA purchase loans increased from 10.8% to 18% between June 2022 and June 2024, a rise of more than 7 percentage points. More conventional borrowers are turning to piggyback loans as a result of the skyrocketing cost of homeownership; as a result, the percentage of piggybacked loans in this group increased from 2.2% in June 2022 to 3.6% in June 2024. 'Piggybacked Purchases' Increasingly Seen for Lower-Value Homes The fact that low-to-moderate income homebuyers, who have been financially pressured by rising inflation and the high cost of living, have been disproportionately affected by hous- ing affordability difficulties is further supported by property prices for homes acquired with piggybacked loans. Further, the value of homes acquired through secondary piggyback loans is usually substantially lower. In addition, over the past two years, there has been a noticeable increase in the price disparity