What Is an 80-20 Loan?
An 80-20 loan is a type of mortgage arrangement where 80% of the home’s purchase price is financed through a primary loan, and the remaining 20% is covered separately—either by the buyer as a down payment or through a second loan.
This structure was traditionally used to help buyers avoid private mortgage insurance (PMI) and reduce upfront costs. In some international markets, like India, developers have offered variations of this structure under what are known as subvention schemes—where buyers pay only 20% upfront, and the bank disburses the remaining 80% directly to the builder.
How the 80-20 Loan Works
Here’s a breakdown of how this setup functions:
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Primary Mortgage (80%): A bank or financial institution provides a loan covering 80% of the property’s value.
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Down Payment or Second Loan (20%): The remaining 20% is typically paid by the buyer as a down payment. However, in some cases, this can be financed through a secondary loan.
In subvention-based schemes (common in countries like India), buyers only pay 20% upfront. The bank pays the rest to the builder, and the buyer may not need to pay EMIs (monthly payments) until construction is complete. In some cases, the builder pays the interest on the buyer’s behalf during construction.
Example
Let’s say a home is priced at $100,000 (or ₹50 lakh in Indian terms):
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80% loan = $80,000 financed by the bank
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20% down = $20,000 paid by the buyer
In subvention schemes, the buyer pays the $20,000 upfront, and the rest is managed by the builder and lender until the property is ready.
Benefits of an 80-20 Loan Structure
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✅ Lower Initial Out-of-Pocket Costs: Buyers can purchase a home without having to save a large down payment.
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✅ Avoid PMI: In the U.S., putting down 20% typically eliminates the need for private mortgage insurance, saving monthly costs.
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✅ EMI Holiday in Subvention Schemes: In international schemes, buyers don’t start repaying until the property is complete.
Drawbacks to Be Aware Of
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Higher Risk in Builder Schemes: If the project is delayed, the buyer may end up paying EMIs before getting possession.
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Tight Lending Criteria: Lenders offering such structures often require strong credit, stable income, and a healthy debt-to-income ratio.
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Possible Higher Interest Rates: Second loans (if used instead of a down payment) may carry higher rates.
Who Qualifies?
To be eligible for an 80-20 loan (especially with two mortgages in the U.S.), borrowers typically need:
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A good credit score (usually 680+)
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Stable income and low existing debt
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Documentation including ID, income proof, and property details
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The ability to cover the 20% second loan or down payment
Why It Matters
80-20 loan structures provide flexibility for buyers who may not have large savings but still want to purchase a home. However, they also come with added complexity and risk, especially when construction timelines or builder reliability are factors.
In the U.S., piggyback loans (like 80/10/10 or 80/15/5) are modern-day versions of this idea—still used today to avoid PMI.
Key Takeaway
The 80-20 loan model is a creative financing strategy that allows buyers to reduce upfront costs or eliminate PMI. However, it’s essential to evaluate the long-term affordability and risks, particularly if the structure involves construction-linked payouts or deferred payments.
