Interest-free, forgivable loans help buyers overcome obstacles
State housing agencies are reviving a mortgage strategy that once played a controversial role during the housing boom of the early 2000s.
This time, however, “piggyback” mortgages, where buyers take out a second loan to lower their initial down payment, have returned with new rules and a focus on helping homebuyers overcome soaring prices and high mortgage rates.
One example is Timothy Payovich, a Texas police officer who had been renting for three years after selling his previous home.
The median price of a home in Kaufman County, Texas, where Payovich was looking, jumped from $235,000 in 2019 to $310,000 in 2024. With the local housing market becoming more expensive, saving enough for a traditional down payment seemed out of reach.
“Interest rates were really high, and with the down payment we were going to need, it was out of reach for us at the time,” Payovich told MarketWatch. “It looked like we were going to have to put it off even longer, which we didn’t want to, because we don’t know how the market is going to be.”
Payovich secured an interest-free piggyback loan through the Texas State Affordable Housing Corporation, which provided him $12,000 to reduce his upfront costs.
While popular before the 2008 housing crash, these types of second mortgages fell out of favor due to concerns about their role in the crisis. At the time, buyers were encouraged to take on risky second loans that often had adjustable interest rates.
Today’s piggyback loans are different. Offered by state housing agencies with far stricter regulations, they are often interest-free and sometimes forgivable.
Programs like the one Payovich used are available across multiple states, including Colorado, Illinois, and Florida. But despite the benefits, awareness remains low.
“We’ve barely touched the surface,” said Joniel LeVecque, senior director of single-family programs at the Texas State Affordable Housing Corporation. “It’s shocking to me, after doing this for eight years, how many folks still don’t know about our programs.”
Only about 11,200 Texas households used the state’s down-payment assistance programs in 2023. LeVecque hopes that by educating real estate agents and mortgage lenders, more people will be able to take advantage of these financing options.
The same trend is happening nationwide, with second mortgages becoming a crucial tool for first-time buyers and those with low to moderate incomes. According to CoreLogic, the share of Federal Housing Administration (FHA) loans with a second lien rose from 10.8% in June 2022 to 18% in June 2024.
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While today’s piggyback loans are safer than those used before the financial crisis, they are still subject to certain limitations. Borrowers must meet income and credit requirements, and the loans are available only for primary residences, not for investment properties. In most cases, the second loan is forgiven after a set period, such as three years, as long as the buyer stays in the home.
Even though these programs offer relief, experts caution buyers to weigh their options carefully. Taking on a second mortgage, even if interest-free, means managing another layer of debt. Still, for many buyers, like Payovich, these loans are making the difference between renting and owning a home.
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