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Back in 2006, our mortgage broker easily got us two mortgages for use when purchasing a home with 10% down:

  • A non-conforming ("jumbo") loan with 80% LTV requirements covering 80% of the purchase, and
  • A HELOC for the remaining 10%

Would a scheme like that work after 2008, in particular in 2013? If not, are there other financing schemes that can be used to purchase a house with a low (five to ten percent) down payment when the amount of financing exceeding the "conforming" limits (708K in our area)?

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I doubt it. I researched it a bit when I was shopping for a HELOC, and found no bank giving HELOC for more than 80% LTV. In fact, most required less than 80%. Banks are more cautious now.

If the bank is not willing to compromise on the LTV for the first mortgage - either look for another bank, or another place to buy. I personally would not consider buying something I cannot put at least 20% downpayment on. It means that such a purchase is beyond means.

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    "It means that such a purchase is beyond means." Not necessarily: it just means that one does not have a down payment, that's all. For example, if I could get a loan to finance 95% of the purchase price, the monthly payment would still amount to under 20% of my monthly income - well within my means by any imaginable standard.
    – Sergey Kalinichenko
    Apr 18, 2013 at 18:04
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    @dasblinkenlight until you lose your job...
    – littleadv
    Apr 18, 2013 at 18:14
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    The "until you lose your job" argument applies to purchases with 20%+ down, wouldn't you agree? I mean, the bank wouldn't let you skip a payment if you buy with 5% or with 95% down.
    – Sergey Kalinichenko
    Apr 18, 2013 at 18:35
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    1.) you didn't answer the question just left your opinion. I was offered a piggy back loan on my upcoming purchase, but I declined. 2.) I felt you were incorrect about your 20% opinion. Lots of people did, could, and would finance for less. Lots of first time buyers, people who are interested in investing cash immediately in their purchase, or people who might want to leave additional resources they have in place. No need for condescension about what one could afford, that wasn't the question.
    – Pablitorun
    Apr 19, 2013 at 12:08
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    @littleadv not really. It is just your experience. I had an opposite experience with my mortgage broker.
    – Pablitorun
    Apr 19, 2013 at 22:32
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There are a few of ways to do this:

  • Ask the seller if they will hold a Vendor Take-Back Mortgage or VTB. They essentially hold a second mortgage on the property for a shorter amortization (1 - 5 years) with a higher interest rate than the bank-held mortgage. The upside for the seller is he makes a little money on the second mortgage. The downsides for the seller are that he doesn't get the entire purchase price of the property up-front, and that if the buyer goes bankrupt, the vendor will be second in line behind the bank to get any money from the property when it's sold for amounts owing.

  • Look for a seller that is willing to put together a lease-to-own deal. The buyer and seller agree to a purchase price set 5 years in the future. A monthly rent is calculated such that paying it for 5 years equals a 20% down payment. At the 5 year mark you decide if you want to buy or not. If you do not, the deal is nulled. If you do, the rent you paid is counted as the down payment for the property and the sale moves forward.

  • Find a private lender for the down payment. This is known as a "hard money" lender for a reason: they know you can't get it anywhere else. Expect to pay higher rates than a VTB.

Ask your mortgage broker and your real estate agent about these options.

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Depends on where we are in the credit cycle.

When banks are scared like in 07 to 11, good luck. Now (13), they'll probably start begging you. There are more regulations that prevent it now, but they'll probably be eased as they usually are during good times.

If the banks won't help you, private investors might. Just find your local mortgage investor club.

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    I never knew mortgage investor clubs existed! It turns out there's one within ten-minute drive from where I live. Thank you very much for the info!
    – Sergey Kalinichenko
    Apr 26, 2013 at 2:59
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You can't get a HELOC, to the best of my knowledge, without actually "owning" the house.

If you get an 80% mortgage (of the purchase price - not the appraised value, btw), you still need 20% as a down payment.

Once you own the home, you can apply for a HELOC ... presuming you have enough equity (eg, the purchase price is $40k less than the appraised value).

We haven't looked at the norm, at least where I live, of 5% down for a traditional mortgage and 3.5% for an FHA (which your question touches on).

If you can do 5% down, on a $1,000,000 mortgage you need $50,000 on the day of closing. If the home is worth (ie appraises for) $1,250,000, you're getting 20% of the house "for free". Presuming the bank(s) will go for it, you could likely then open a HELOC for as much as $250,000 (again, depending on individual lender rules).

tl;dr:
If you don't have the money ready on the day of signing (via seasoning, if it is a loan/gift, or because you have been saving), you cannot afford the house.

To clarify from comments with the OP, I am in no way speaking to the buyer's ability to afford the monthly payments - this is only about affording the initial costs associated with the home buying process (down payment, closing, whatever else the bank(s) require, etc).

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    "You can't get a HELOC, to the best of my knowledge, without actually "owning" the house." We got HELOC as a second purchase loan on the day of closing back in 2005, so you definitely could get one back at the day. As far as your comment on the "cannot afford the house" goes, that's far from being an accepted fact.
    – Sergey Kalinichenko
    Apr 25, 2013 at 20:15
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    @dasblinkenlight - and that was 2005. This is 2013.
    – warren
    Apr 25, 2013 at 20:16
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    @dasblinkenlight, wrt to being able to afford the house: if you don't have the money for it, you, by definition, cannot afford it. You may have that money via a loan (mortgage), cash (savings, gift, etc), or a combination. But if you don't have the money, you can't buy it because the seller won't sell.
    – warren
    Apr 25, 2013 at 20:18
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    If servicing the debt plus taxes plus maintenance plus insurance takes less than 20% of your income, you definitely can afford the house - and that's a fact. The amount of downpayment has nothing whatsoever to do with this: it determines the way the risk is split between you and the bank issuing the loan. Statistically, 20% downpayment translates into virtually zero risk to bank's interest in the property.
    – Sergey Kalinichenko
    Apr 25, 2013 at 20:28
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    @dasblinkenlight - I'm not talking about affording the home after the purchase: this is entirely about affording the purchase itself :). If you don't have the prerequisites to buy, you cannot afford it.
    – warren
    Apr 26, 2013 at 14:35

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