With affordability remaining an ongoing challenge, many would-be homebuyers are seeking nontraditional avenues to pinch their pennies and still achieve their homeownership dreams, with piggyback loans among such options seeing more activity, according to CoreLogic. The strategy, however, is not without risk.
Piggyback loans, which are separate home equity loans or home equity lines of credit (HELOCs) that buyers take out in addition to their first, main liens, are being tapped by homebuyers to cover their downpayments or closing costs. Many borrowers, CoreLogic explained, piggyback their conventional mortgages by combining a 10% cash downpayment with another 10% through a piggyback loans.
There are drawbacks, though, with many such loans carrying a high cost of capital: higher interest rates than primary mortgages, as well as separate closing costs and origination fees.
FHA loans in particular have seen a marked rise in piggybacking — notable because many FHA borrowers are first-time buyers dependent on FHA benefits to be able to afford homeownership in the first place. Historically, the share of FHA purchases that are piggybacked are already higher than other types of financing; piggybacked FHA purchase mortgages accounted for 9.8% of total FHA purchase volume as of 2017, compared to just 3.8% of conventional purchases. At the end of 2019, piggybacked purchase share among FHA purchases was 13.8%, compared to 3.2% for conventional purchases.
Between June 2022 and June 2024, the share of piggybacked FHA purchases climbed even more, growing from 10.8% to 18% (a pickup of more than 7 percentage points). With affordability at such a premium, more conventional buyers are getting in on the act as well, with the piggybacked share of conventional loans increasing from 2.2% in June 2022 to 3.6% in June 2024.
The use of piggyback loans are also on the uptick among purchases for homes with lower values, suggesting again that use of such products is rising among low- to moderate-income homebuyers searching for ways to buttress their affordability. This has pushed down the values of homes bought with piggybacked loans over the course of the last few years. In 2017, the median property value of homes bought with piggybacked FHA loans was 17% less expensive than homes bought without piggybacked loans, a difference of roughly $34,600. In 2022, the gap between medians grew to 19%, or about $55,000. Now, just two years later, the gap widened again to 20%, a difference of some $64,000.
CoreLogic also noted that homebuyers who avail of piggybacked home purchases often find themselves over-leveraged. As of June, the median origination loan-to-value (LTV) ratio among piggybacked FHA loans is 98.19 — and that’s before adding in the amount of money borrowed with the piggyback loan itself. For conventional loans, the LTV rose to 94.5 in June after consistently hovering above 90 over the past year.
Taking into account the amount financed via piggyback loan, homeowners’ equity often vanishes completely or drops into the red. With piggyback loans entered into the equation, the combined LTV for borrowers with piggybacked mortgages was 1.02 for FHA loans and 1.0 for conventional products in June.
“Despite wide expectations that home prices will continue to rise, and that the U.S. economy will remain robust while inflation continues to fall — not to mention a much-anticipated September Federal Reserve policy rate cut — it is nevertheless worth keeping a close eye on the performance of these highly leveraged loans in the coming months,” CoreLogic principal and economist Yanling Mayer wrote on the company’s blog.
