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 Details
When doing split financing these terms are typically thrown around: 2nd liens, second mortgages, piggy back seconds, 80/10/10, 80/15/5, and 80/20. All these terms mean the same thing. Below are the second mortgage details but if you want basic information (like why to have a 2nd at all) then visit Split Financing Overview for more information. If you’re actually about to start the process and get a second mortgage then read this page and then continue to Second Lien Lender Disclosures for information on what to expect next. And as always, you can visit our 1st and 2nd Split Financing Payment Calculator to determine potential payment for your two mortgages.
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.
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.
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.
Costs and Points
Typical second lien closing cost range from $500 to $700 and don’t charge any points and don’t require a title policy. That said, if you own a current home and will be selling it after your purchase, some 2nd lien lenders may charge up to 2 points in origination by default. Let us know if this is the case and we’ll either call to get that removed or switch you to another lender. The 2 points are charged because the second lien lender is making the assumption that this is a “bridge loan” and that you will be paying them off immediately after the sale of your home.
While our first lien loans don’t have prepayment penalties, some second liens do if the loan is paid off within the first year. Therefore, let us know if you plan on paying off the 2nd lien within the first 12 months and we’ll make sure to put your loan with a lender that doesn’t have those penalties.
If you are getting a second lien that is amortized over 30 years, chances are that the loan has a balloon payment feature. This loan type is typically referred to as a “30 due 15” or “30/15” because it’s really a 15 year loan that is amortized over 30 years. The balloon payments means that at the end of 15 years the second lien will need to be paid off completely. This can be done by either paying cash or refinancing the second lien.
A 30 year fixed rate second lien option does exists but the rate is typically .25% to .5% higher. Since most folks either plan to pay off the second mortgage before the 15 years and/or plan on selling the home before 15 years the balloon payment is non-issue.
Separate Closing Docs
At closing you will have to sign two sets of loan documents – one for us and one for the second lien. This means that the title company needs instructions from both lenders in order to prepare the HUD-1 Settlement Statement for closing – and that your closing paperwork increased by 50%. (Second lien lender’s closing packages are about half the size of a first lien loan).
Please note that a number of second lien lenders are credit unions and they will require you to become a “member” at closing. Membership is free and doesn’t require you do anything more than sign a form and become a member – i.e. you don’t have to bank with them or open any accounts.
“Random” Payment Due Dates
Some second lien lenders will have random payment due dates AND don’t allow you to “skip” the first month’s payment. For example: there is a popular 2nd lien lender that has a due date equal to the date you close. Meaning, if you close a loan on February 25th, your payment due date moving forward will be the 25th of every month and the first payment will be due March 25th. (As an FYI comparison, a first lien that closes on February 25th will have payments due on the 1st of every month with the first payment being due April 1st).
Please be sure to call us if you have any questions AND forward us any documents that the second lien lender provides as we’re happy to review them and ensure that we’re all on the same page.
Loan Officer, NMLS # 729612