Do 80/20 mortgages still exist?
The 80/20 loan is a dying breed at the moment. The problem obviously comes from the subprime mortgage problem. Here is how: When a house forecloses, the order in which each loan is paid off from an auction, bank redemption, etc, is predetermined by law. Taxes, HOA, etc are paid first. Next is the first mortgage. And then the second mortgage, followed by mechanics liens, hospital liens, etc. Often times, when the market is declining, the real value of the property is much less than the amount owed on the loan. So when a house goes to auction, by the time the lender with the first mortgage is paid, in addition to all of the attorney fees and auction costs, often times there is no money left to pay the lender of the 2nd mortgage. This leaves many banks EXTREMELY reluctant to lend in a second position when the entire value of the house is being financed. Two years ago, it was quite common in a market headed upwards. People most often chose an 80/20 loan to prevent saving a down payment, an
