The share of buyers purchasing homes with the help of a second mortgage — or “piggyback mortgage” — tacked onto a first mortgage has risen over the past two years, the result of high home prices, elevated interest rates, and general inflation reducing homebuyer affordability.
As the housing affordability crisis has disproportionately impacted first-time homebuyers (FTHBs) and those who are least able to afford a home, so the two-year rise in piggybacked loans has largely occurred among FTHBs and low-to-moderate income borrowers who more frequently use Federal Housing Administration (FHA)-backed mortgages.
From June 2022 to June 2024, the share of piggybacked FHA purchase loans rose from 10.8% to 18%, new CoreLogic research shows. Elevated costs of homebuying have also pushed more conventional borrowers to take out piggyback loans, though at a much lower rate than FHA borrowers, with the share of piggybacked loans among conventional borrowers rising from 2.2% in June 2022 to 3.6% as of June 2024.
“The shares of piggybacked home purchases are historically higher for FHA borrowers,” noted CoreLogic economist Yanling Mayer, who authored the research post. In 2017, the loans accounted for just 9.8% of the FHA market but grew to 13.8% by 2019.
The source of funding for the piggybacked second mortgages varies, Mayer said, from community-based down payment assistance (DPA) programs to state housing finance agencies to private lenders. The funding source determines the financial burden a piggybacked mortgage may pose on new homeowners. Some DPA seconds offer loan forgiveness and zero-percent interest rates; others require balloon repayment if and when the property is sold or refinanced.
“I’m still seeing a lot of those seconds coming from private lenders,” Mayer told NMP, discussing her research. “In terms of affordability, the burden on the family’s budget, I think those are probably a bigger concern than the ones coming from community sources.”
That concern arises from Mayer’s review of loan-to-value (LTV) ratios of piggybacked home purchases, which revealed that homebuyers with these properties are over-leveraged, with the amount borrowed with piggyback loans leaving homeowners with zero or even negative equity.
Before taking into consideration the amount of money borrowed with a piggyback loan, the median origination LTV among piggybacked FHA loans is 98.19, per Mayer's review of available data. With conventional loans, median origination LTV has ranged from 80 to above 90. Over the last 12 months, the LTV on conventional loans has consistently been above 90, with the ratio reaching 94.5 in June 2024.
In June 2024, the combined LTV (CLTV) reached 1.022 for FHA borrowers and 1.0 for conventional borrowers purchasing with piggybacked mortgages.
The overall performance of these over-leveraged loans will largely depend on the resilience of the U.S. economy and the strength of the job market, Mayer added. With little or zero equity in the home, many borrowers are at a greater risk of nonpayment and default should there be an unexpected, adverse impact from employment or family finances.
The use of piggybacked second mortgages will likely continue, Mayer said, as long as affordability constraints persist. Even with a Federal Reserve rate cut widely anticipated for September, home prices continue to climb and other costs of homeownership like insurance and utilities remain high.
“In the immediate term, say within six months, I expect to be at least in the same situation as we are seeing now,” Mayer predicts.
Homes purchased with piggyback loans are typically much lower in value, further corroborating CoreLogic’s observation that housing affordability woes have disproportionately impacted low-to-moderate-income homebuyers. And, the difference in median values of homes bought with a second mortgage and those bought without one has widened over the last two years, Mayer observed.
At the end of 2017, homes bought with a piggybacked FHA loan were $34,600 (17%) cheaper than those bought without one ($168,600 versus $203,200). By June 2022, the difference had grown to $55,000, or 19% cheaper ($237,800 versus $292,800). In June 2024, the gap was $64,000, with the median value of homes purchased with a piggybacked FHA loan at $255,000, versus $319,000 for those purchased without one.
A similar trend arises when comparing homes bought using conventional financing. In June 2022, piggybacked homes had a median purchase price of $265,000, which was $135,000 or 33% cheaper than the median price of non-piggybacked purchases. In June 2024, the gap widened to 36%, with piggybacked homes reaching a median purchase price of $262,000 compared with the median price of a non-piggybacked purchase of $410,000.
