Why do Buyers take out two loans when purchasing?

Question

I've always wondered why Buyers tend to have two loans instead of just taking out one loan to purchase. Why is this?

Answer 1

To avoid paying PMI (property mortgage insurance) which is charged on a loan if you do 100% financing thru the bank. If someone needs to finance 100% of the loan a lot of lenders will only finance 80% so a buyer is forced to seek financing for the 20% balance or they want to avoid having to pay PMI. That's why it's always important to put down 20% at closing to avoid this. But it's not abnormal to do. Some buyers can't get 100% financing because of credit so they seek alternate means or they cannot come up with 20% down so they have to finance 100%. I was asked if I would finance my buyer the 20% and take out a second mortgage for her and she would pay me like she pays the bank, I have the same rights as the bank and can lien the property if she fails to pay, BUT the bank would be the first lien holder which means they get paid first and I would be paid second if the property foreclosed. I chose not to do this and went with another buyer.

Hope that helped.

Answer 2

That way you can borrow 100% of the house cost. Or, sometimes buyers do not have the requisite 20% to put down on a house. To avoid having to pay pmi (private mortgage insurance) you get a second, wrap around mortgage from a second bank. You then save $$. THough the interest rate will be higher, it's deductible.

Answer 3

Not all do, but some do to avoid paying PMI. PMI is mortgage insurance when you do not put down at least 20% when you purchase.

Answer 4

They are avoiding PMI when they don't have 20% downpayment.