HELOC: Down Payment for First-Time Homebuyers?

Lending rules allow you to tap equity in your future home to help cover the down payment.

You can take out a second mortgage, often called a home equity line of credit or HELOC, on the home you’re buying, even before you own it.

You can do this even as a first-time buyer.

The basics: get a first and second mortgage simultaneously. You might hear the terms “simultaneous second,” “piggyback mortgage,” “purchase-money second,” or “80/10/10” to describe this strategy.

The HELOC counts as part of your 20% down payment, helping you avoid private mortgage insurance (PMI).

Here’s how to get a HELOC on your first home.

The First-Time Homebuyer HELOC Strategy

Most people don’t have 20% down for today’s home prices. Yet, they want to avoid mortgage insurance.

Luckily, lenders consider a HELOC on the property you’re buying as part of the 20% down payment.

For example, you get a first mortgage for 80% of the purchase price, a HELOC for 10%, and put 10% down. The first mortgage lender waives the PMI requirement.

You’re not hiding the HELOC. The first mortgage lender knows about it and must qualify you with the payment. Still, as far as it’s concerned, a 20% down payment has been made. It’s a seemingly strange lending loophole that’s accepted by lenders.

First-Time Homebuyer HELOC Guidelines

Guidelines vary by lender, but here are general requirements.

Conventional Loan: You will need a conventional loan underwritten by rules from Fannie Mae or Freddie Mac. Most lenders offer these.

10% down: The first mortgage allows you to get a 15% second mortgage. But the second mortgage lender often caps this to 10%, meaning you’ll likely need 10% down plus closing costs.

Great credit: You can get the first mortgage with a score down to 620. But the second mortgage lender will want to see at least 680 to 700 or higher.

Good income: The first and second mortgage payments, property taxes, homeowner’s insurance, and HOA dues must be no more than around 25-35% of your income, depending on your other debts. If your total payment were $3,500, you would need an income of about $10,000 per month.

First-Time Homebuyer HELOC Examples

Here’s how you would structure the first and second mortgages with this strategy compared to getting one loan for 90% of the purchase price.

Loan Amount Example

Payment Example

80% first mortgage at 7.25%, 10% second at 9% interest only; 90% single loan at 7%. PMI costs per MGIC. Rates are for example purposes only and may not be available.

In this example, the “piggyback” first and second combo mortgages cost about $100 less per month. But your cost will vary, so get a personalized quote.

Get your first and second mortgage loan quotes now.

Things to Know About This Strategy

Two loans: You’ll get two separate loans, potentially from different lenders, although some lenders can process both loans.

Two payments: You’ll make two separate payments each month.

Higher rate than one loan: The first mortgage lender will charge a higher rate of around 0.25% to 0.50% for having a second mortgage; it’s an added layer of risk for the lender.

HELOC rates: The rate on the HELOC is variable. It can go up or down based on economic conditions. It will start around 2-3% higher than your first mortgage rate.

Home equity loan option: You have the option of a fixed home equity loan rather than a HELOC. This can make payments more predictable.

Pay off the 2nd at any time: You can pay off the HELOC at any time. Only your first mortgage payment will remain. This may prove easier than trying to remove mortgage insurance.

Harder to refinance: If rates drop, it’s more difficult – but not impossible – to refinance your first mortgage. You have to re-subordinate the HELOC.

Finding the Simultaneous 2nd Lender

Some first mortgage lenders will have HELOC programs available for this purpose. They can take your application for both loans.

If you can’t find such a lender, you can apply with any lender for the first mortgage then find your own HELOC provider.

Many credit unions, national banks, and online lenders offer HELOCs. Try to find one that offers zero closing costs.

Find your HELOC lender.

Simultaneous Closing: Your Biggest Challenge

Often, it pays to find a lender that can handle both loans.

Do not trust all HELOC lenders to close on time. Most issue these loans on homes people already own, so they are not used to meeting closing dates.

Whoever you choose for your HELOC, have a conversation upfront about whether they can close on a specific day.

Your HELOC must close on the same day as your first mortgage. This can be a major challenge for many HELOC lenders.

Can You Get the HELOC After You Buy?

To avoid the stress of a simultaneous closing, you might choose to put 20% down then reimburse yourself with a HELOC after closing.

You can apply for a HELOC or home equity loan the day after you close. HELOCs usually take just a few weeks.

See if you can borrow from your 401k, tap savings, or otherwise come up with 20% temporarily. Open a HELOC after closing to reimburse yourself.

Alternatives to Purchase-Money HELOCs

Using a HELOC to help buy a home is a great solution, but not everyone will qualify. There could be more affordable options on the market as well.

10% down mortgage: Finance 90% of the home purchase with a single loan. This requires PMI, but it’s a simpler solution.

FHA loan: A 3.5%-down loan for those with marginal credit or income.

3% down conventional: Get a conventional loan for as little as 3% down.

Mortgage recast: Some buyers might use a HELOC before they receive an inheritance, bonus at work, or other windfall. Instead, you could take a larger first mortgage and make a lump-sum payment toward your mortgage later. Have the lender recalculate the payment with a mortgage recast.

Start Your HELOC-Assisted Purchase

Buying your first home can feel overwhelming, but a HELOC can help. Tap your future home’s equity to help cover the down payment.

Speak with a lender about this strategy now.