Understanding Conforming Loan Limits in California
Before comparing jumbo and piggyback loans, it’s crucial to understand why they exist. Federal regulations, set by the Federal Housing Finance Agency (FHFA), establish a maximum loan amount for mortgages that Fannie Mae and Freddie Mac can purchase. This is known as the conforming loan limit. Any loan amount above this limit is classified as a jumbo loan.
In most of the U.S., the 2024 limit for a single-family home is $766,550. However, in high-cost areas where property values are significantly higher, this limit is increased. For example, in Los Angeles County and Orange County (home to cities like Irvine), the conforming limit is set at $1,149,825. If you need to borrow more than this amount to purchase a home, you’ll need a non-conforming loan, which brings you to a critical decision: a jumbo loan or a piggyback mortgage.
How Does a Piggyback Loan Work to Avoid a Jumbo Loan?
A piggyback loan isn't a single mortgage; it's a strategy that uses two separate loans simultaneously to finance a home purchase. The most common structure is the '80-10-10' loan.
Here’s how it works:
- 80% First Mortgage: The primary loan covers 80% of the home's purchase price. This loan is intentionally kept at or below the conforming loan limit for the area. By staying at an 80% loan-to-value (LTV) ratio, you completely avoid the need for Private Mortgage Insurance (PMI).
- 10% Second Mortgage: A smaller, secondary loan covers another 10% of the purchase price. This 'piggybacks' on top of the first mortgage. It can be a fixed-rate loan or a Home Equity Line of Credit (HELOC).
- 10% Down Payment: You, the buyer, contribute the remaining 10% as a cash down payment.
Example: Buying a Home in Los Angeles
Let's say you want to buy a $1,300,000 home in Los Angeles. You have $130,000 saved for a 10% down payment. Your required loan amount is $1,170,000, which exceeds the local conforming limit of $1,149,825, pushing you into jumbo territory.
Instead of getting a single jumbo loan, you could use an 80-10-10 piggyback structure:
- First Mortgage (80%): $1,040,000 (This is a conforming loan, below the $1,149,825 limit).
- Second Mortgage (10%): $130,000.
- Your Down Payment (10%): $130,000.
With this strategy, you successfully financed your home with only 10% down, avoided PMI, and bypassed the need to qualify for a jumbo loan.
Qualification Requirements: Jumbo vs. Second Mortgages in Los Angeles
The qualification standards for these two paths are distinctly different. Jumbo lenders are taking on more risk with a larger loan amount, and their requirements reflect that.
Qualifying for a Jumbo Loan
Lenders typically require a stronger financial profile for a jumbo loan. While specifics vary, you can generally expect:
- Higher Credit Score: A minimum credit score of 700 is often required, with the best interest rates reserved for borrowers with scores of 740 or higher. (The data, information, or policy mentioned here may vary over time.)
- Lower Debt-to-Income (DTI) Ratio: Jumbo lenders are often stricter with your DTI, preferring it to be at or below 43%, including your new proposed housing payment. (The data, information, or policy mentioned here may vary over time.)
- Significant Cash Reserves: You'll need to prove you have substantial liquid assets remaining after closing. Lenders often require 6 to 12 months' worth of mortgage payments (including principal, interest, taxes, and insurance) in savings. (The data, information, or policy mentioned here may vary over time.)
- Larger Down Payment: A 20% down payment is standard for jumbo loans. Some lenders may offer options with 10-15% down, but this usually comes with higher rates or other compensating factors. (The data, information, or policy mentioned here may vary over time.)
Qualifying for a Piggyback Loan (Second Mortgage)
With a piggyback loan, you must qualify for two separate loans, but the requirements are often more accessible.
- First Mortgage: This is a standard conforming loan, so it follows the guidelines set by Fannie Mae and Freddie Mac. These are generally more flexible than jumbo requirements regarding credit score and DTI.
- Second Mortgage: The lender for the second mortgage will have its own underwriting process. They will review your credit and DTI, but the focus is on a much smaller loan amount. This can make approval easier than qualifying for one enormous jumbo loan.
Comparing Monthly Payments: Piggyback vs. Jumbo Loans
Determining which option has a lower monthly payment is complex because it depends entirely on the interest rates you secure for each loan.
A jumbo loan is one single payment. A piggyback loan involves two separate payments. Generally, the interest rate on a conforming first mortgage will be very competitive. The rate on the second mortgage, however, will almost always be higher because it is in a subordinate lien position, meaning it carries more risk for the lender.
Payment Scenario in Irvine
Let's revisit the $1,300,000 home purchase in Irvine with a 10% down payment.
Jumbo Loan Scenario:
- Loan Amount: $1,170,000
- Hypothetical Interest Rate: 6.75% (30-year fixed)
- Monthly Principal & Interest Payment: ~$7,589
Piggyback Loan Scenario:
- First Mortgage: $1,040,000 at 6.5% (30-year fixed) = ~$6,573
- Second Mortgage: $130,000 at 9.5% (HELOC or fixed second) = ~$1,093
- Total Monthly Principal & Interest Payment: ~$7,666
In this specific example, the single jumbo loan results in a slightly lower monthly payment. However, if you could secure a better rate on the second mortgage or if jumbo rates were higher at the time, the piggyback could easily become the cheaper option. The key benefit of the piggyback remains achieving financing with a lower down payment and bypassing jumbo qualification rules.
Down Payment Differences in Irvine and Other High-Cost Areas
This is where the piggyback loan strategy truly shines, especially in expensive markets like Irvine.
- Jumbo Loan: The standard expectation is a 20% down payment. On a $1.3 million home, that’s $260,000 in cash. While some lenders offer jumbo products with less down, they are less common and come with stricter terms.
- Piggyback Loan: This structure is explicitly designed to allow for a lower down payment, most commonly 10%. For that same $1.3 million home, the down payment is $130,000. This makes homeownership accessible much sooner for buyers who have strong income but haven't yet saved up a 20% down payment.
Interest Rate Structures on Second Mortgages
The second mortgage in a piggyback arrangement can come in two primary forms, each with different implications for your monthly payment.
- Fixed-Rate Second Mortgage: This is a straightforward installment loan. Your interest rate and monthly payment are fixed for the entire term of the loan (e.g., 15 or 20 years). It offers predictability and is ideal for borrowers who prefer stable payments.
- Home Equity Line of Credit (HELOC): This is a more common option. A HELOC functions like a credit card secured by your home. It has a variable interest rate tied to a benchmark like the Prime Rate. During the initial 'draw period' (often 10 years), you may be able to make interest-only payments, which can lower your initial monthly outlay. However, you face the risk of your payment increasing if interest rates rise.
Mortgage Insurance: Which Option Offers an Easier Exit?
For borrowers focused on avoiding extra monthly fees, the piggyback loan is the undisputed winner.
- Piggyback Loan: This structure is designed to avoid PMI entirely. Since the first mortgage is at an 80% LTV, PMI is never required in the first place. There is no mortgage insurance to worry about or try to remove later.
- Jumbo Loan: If you secure a jumbo loan with less than 20% down, the lender will likely require a form of mortgage insurance or charge a significantly higher interest rate to compensate for the added risk. Removing this insurance can be a cumbersome process, often requiring you to petition the lender, pay for a new appraisal to prove you have 20% equity, and meet their specific seasoning requirements.
Managing Two Mortgages: Taxes and Insurance Implications
Having two mortgages does not complicate your property taxes or homeowners insurance. These expenses are tied to the property itself, not the financing. You will still receive a single property tax bill and have a single homeowners insurance policy. Typically, these are paid through an escrow account managed by the servicer of your first mortgage. The servicer of your second loan is not involved.
The only real complication is administrative. You will have two separate monthly loan statements and will need to make two separate payments to two different lenders. This requires a bit more organization but is a minor inconvenience for most borrowers.
Long-Term Financial Pros and Cons
Choosing between these two options has significant long-term consequences. Here’s a summary of the trade-offs.
Piggyback Mortgage: Pros and Cons
- Pros:
- Requires a lower down payment (often 10%).
- Completely avoids PMI from day one.
- Allows you to bypass stringent jumbo loan qualification criteria.
- You can strategically pay off the smaller, higher-interest second mortgage more quickly to reduce your total debt.
- Cons:
- Requires managing two separate monthly payments.
- The second mortgage has a higher interest rate.
- If using a HELOC, your payment could increase if interest rates rise.
- You will have closing costs associated with two loans. (The data, information, or policy mentioned here may vary over time.)
Jumbo Mortgage: Pros and Cons
- Pros:
- Simplicity of a single loan and one monthly payment.
- Often offers a competitive, stable fixed interest rate for the entire loan amount.
- No variable-rate risk on the primary financing.
- Cons:
- Extremely strict qualification standards (credit, DTI, reserves).
- Typically requires a large down payment of 20% or more.
- If you put down less than 20%, you will likely face high mortgage insurance costs that are difficult to remove. Deciding between a jumbo and a piggyback loan depends on your credit profile, cash reserves, and long-term financial goals. To see which structure best fits your home purchase in the California market, it’s essential to explore specific scenarios with a dedicated mortgage strategist.
Ready to see how these options could work for your California home purchase? By analyzing your specific financial profile, we can determine the most advantageous path forward. Apply now to get a personalized breakdown and start your journey to homeownership.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
