Tandem Loan

What is 'Tandem Loan'

A tandem loan is two loans taken out on one asset, which is usually a house; the secondary loan is normally added to a primary loan. A tandem loan may also refer to a lending facility that enables businesses to bridge the gap between commercial loans and other sources of funding, with loan proceeds used for working capital, acquisitions, or land and equipment. They could provide monetary assistance to builders and developers of nonprofit public housing.

BREAKING DOWN 'Tandem Loan'

A specific type of tandem loan is the Federal Housing Administration's FHA/VA Tandem Loan, which is only available to veterans for financing single-family loans. Tandem loans should not be confused with a tandem plan, which refers to a mortgage purchase program involving Fannie Mae and Ginnie Mae.

Examples of ‘Tandem Loan’

There are two common reasons why a tandem loan would be used to finance real estate. The first scenario is when the buyer doesn't want, or is unable, to come up with a large enough down payment. The lender will sometimes assist by offering the tandem loan to help pay the balance. A buyer might do this to avoid paying PMI insurance, or to minimize out-of-pocket expenses at closing. Additional income and higher credit are usually necessary in order to qualify for such additional borrowing. 

The other popular use for the tandem loan, as a second mortgage, is to avoid the added expense of a jumbo loan. These more expensive mortgages are made for amounts that exceed the caps on conventional loans. To avoid taking out a jumbo loan, a buyer might use a tandem loan to borrow just enough to reduce the first mortgage down below the jumbo's level.

However, tandem loans as a second mortgage don’t have the advantages they used to, because Fannie Mae is now authorized to guarantee many jumbo loans. That makes them more affordable. Also, private mortgage insurance (PMI) is also tax deductible, removing another compelling reason to use a tandem loan. Last but not least, the mortgage crisis has put the brakes on small down payments and has also made it impossible to refinance many first mortgages without first paying off the second mortgage. These changes make tandems less attractive and more inconvenient.

When tandem loans are used in a business context, there are often stipulations. They may require the business to be growth oriented, to have an economic development focus, or to be involved in the construction of community facilities.