What is a Combination Loan?

Opting for a combination loan offers several compelling advantages that can make your homeownership journey more manageable and cost-effective:

1. Avoidance of Private Mortgage Insurance (PMI): One of the most significant benefits of a combination loan is that it allows you to circumvent the need for PMI. Typically, when your down payment is less than 20% of the home's purchase price, lenders require you to pay PMI to protect their investment. However, by structuring your financing as two separate loans, you can effectively avoid this additional expense, saving you money in the long run.
2. Lower Monthly Payments: Combination loans can often result in lower monthly payments compared to a single mortgage that includes PMI. The interest rates on the primary mortgage may be more favourable, potentially reducing your overall borrowing costs and making your monthly obligations more manageable.
3. Greater Flexibility: This financing approach provides you with increased flexibility in terms of securing your home with less upfront cash and potentially better loan terms. By leveraging a combination loan, you can tailor your financing to suit your specific needs and financial situation, giving you greater control over your homeownership experience.
4. Tax Deductibility: Another advantage of combination loans is that the interest paid on both the primary and secondary loans may be tax-deductible, subject to applicable tax laws and regulations. This can provide additional financial benefits, allowing you to optimise your tax planning and potentially reduce your overall tax liability.

To qualify for a combination loan, borrowers must meet specific requirements that align with traditional mortgage standards. The eligibility criteria include:

• Credit Score: A strong credit score is essential, typically requiring a minimum of 620 or higher, depending on the lender. A higher score can lead to better terms and lower interest rates for both loans involved in the combination loan.
• Income Stability: Lenders usually look for stable income sources. Borrowers must provide documentation such as pay stubs, tax returns, and bank statements to assure the lender of their ability to manage the payments on both loans.
• Debt-to-Income Ratio (DTI): A low DTI is crucial, generally not exceeding 43%. This ratio helps lenders assess whether a borrower can afford the additional financial obligation of a second mortgage without financial strain.
• Down Payment: Combination loans often allow for down payments as low as 5% or 10%, depending on the structure of the loan (like the 80-10-10 model). Borrowers must demonstrate the availability of these funds, which can be sourced from savings, gifts, or other acceptable means.
• Loan Documentation: Borrowers must provide comprehensive financial documentation showing their financial stability and ability to handle two separate loan payments. This might include bank statements, proof of down payment sources, and information on other debts.

Combination loans are characterised by several distinct features that make them attractive to certain homebuyers. These features include:

• Two Separate Loans: A combination loan consists of two mortgages—typically one that covers 80% of the home's purchase price and a second that covers an additional 10-15%, allowing the borrower to provide the remaining amount as a down payment. This structure helps avoid PMI, which is generally required for down payments below 20%.
• Types of Loans Involved: The primary loan is usually a conventional mortgage with a fixed or adjustable rate, while the secondary loan may be a home equity line of credit (HELOC) or another type of financing that often carries a higher interest rate.
• Flexibility in Down Payments: By using a combination loan, buyers can reduce their initial cash outlay, making it easier for first-time buyers or those with limited savings to enter the housing market. This flexibility is crucial in competitive real estate markets.
• Potential for Lower Monthly Payments: The division of the loan into two parts can lead to a lower monthly payment on the primary mortgage, especially if the second loan's interest rate is manageable.
• Risk Factors and Fees: Borrowers must be aware that having two mortgages can lead to increased costs, including potentially paying double servicing fees. Additionally, if the second mortgage has a variable rate, it may increase over time, affecting affordability.
• Avoiding Jumbo Loan Requirements: Combination loans can be particularly beneficial for buyers who need a larger loan amount that exceeds conventional limits, as they can avoid the stricter qualification requirements associated with jumbo loans.

Applying for a combination loan involves several key steps to ensure a smooth process. First, determine your eligibility by assessing your credit score, debt-to-income ratio, and other financial qualifications necessary for both loans. Next, choose a lender that offers combination loans and compare their terms, interest rates, and additional costs to find the best fit for your needs.

Once you've selected a lender, apply for both the primary and secondary mortgages simultaneously. This is often done with a single lender to streamline the process. After submitting your applications, review the loan terms carefully, including repayment schedules, interest rates, and monthly payment requirements for each loan.

Finally, complete the underwriting process and close on both loans. Once the paperwork is finalised, you can begin making payments on your combination loan. By following these steps and working with a trusted lender, you can successfully secure a combination loan to achieve your homeownership goals.

When it comes to securing a combination loan, choosing the right lender is crucial. At Airtel Finance, we are committed to providing our customers with flexible and affordable financing options tailored to their unique needs. Our team of experienced professionals will guide you through the entire process, from determining your eligibility to finalising your loans.

We offer competitive interest rates and transparent terms, ensuring that you have a clear understanding of your repayment obligations. With our streamlined application process and quick turnaround times, you can secure your combination loan and move forward with your homeownership dreams without unnecessary delays.

At Airtel Finance, we prioritise our customers' financial well-being and strive to build long-term relationships based on trust and reliability. By choosing us as your lender for a combination loan, you can rest assured that you are working with a partner dedicated to your success.