Split Financing means using two mortgages to purchase or refinance a home so that the total amount financed is “split” up into two loans. A second lien is a mortgage that exists behind a first lien mortgage and is typically used to avoid Mortgage Insurance (MI) and/or Jumbo financing. Split financing and second lien loans are also referenced as: piggy back loans, 80/10/10, 80/15/5, etc. Check out our page on Second Mortgage Details and Second Lien Lender Disclosures if you plan on using a second lien to purchase or refinance a home.
Second mortgages typically have higher interest rates than first lien mortgage because they inherently contain more risk. In the event that a borrower’s defaults on a loan (i.e. gets foreclosed on) the first lien lender will be paid before the second lien lender which means the second lien lender may not get their full investment returned. For this reason, the underwriting guidelines for second loans are slightly more conservative than first liens.
Second liens typically have about $500-700 worth of closing costs and have their own set of closing documents.
Most second lien lenders will require a 680 Credit Score or better. The investors that don’t have a minimum will require 10% down and may have tougher underwriting guidelines.
Reasons For Split Financing
A few reasons why a second lien loan may exists are:
- to avoid Mortgage Insurance by keeping the first lien at 80% LTV or less
- to avoid Jumbo financing by keeping the first lien a Conforming Loan ($417,000 or less)
- to take cash out of the home (i.e. Home Equity Loans and/or HELOCs)
- to do Home Improvements
- to act as a Bridge Loan for a purchase (i.e. get the second loan with the intention of paying it off once your current home sells after the new purchase).
Loan Terms and Structure
Second liens can have a variety of different program options. For purchase transactions, fixed rate programs are typically offered. Refinances also have fixed rate options but can venture into variable rate programs as well – it just depends on the loan type. Examples of second lien programs are:
- 30/15 Year Balloon – for purchases and refinances – most common
- 30 year fixed rate – for purchases and refinances
- 20 year fixed rate – for purchases and refinances
- 15 year fixed rate – for purchases and refinances
- 10 year fixed rate – for purchases and refinances
- Variable Rates – for refinances
- Variable Rate with Interest Only payments – for refinances (ex: HELOC)
Note: a home may have a third lien that is subordinated behind the first and the second loans but this is very, very rare.