Video Transcription Aloha. This is George Krischke, with Honolulu Hi 5.
Today, we’re going to talk about mortgage financing. This is basically to get a loan to purchase a piece of real estate. There are many different types of mortgage loans available. Loan products, they come and go, and the requirements to qualify for them, they change all the time. We’re going to touch on the most common loan products available.
Number 1, it’s the conventional loan. Number 2, it’s the portfolio loan. Number 3, we’re going to talk a little bit about government loan programs. Number 4, we’re going to talk about land loans.
Let’s start with the conventional loan program. It is by far the most common loan program in the State of Hawaii. The property as well as the buyer has to undergo a strict qualification standards. If the property is not quite fitting the requirements, you would not be able to get a regular conventional loan program. It has to comply with what we call Fannie Mae and Freddy Mac standards. We’ll discuss that some other time. Minimum down-payment requirement may be 10%, sometimes as little as 5%. As a rule of thumb, if you have 20% down payment, you’re golden. Also a minimum FICO score has to be … you have to have a certain minimum FICO score. FICO score is the credit worthiness, it’s the credit score that the buyer has. Those requirements can change.
Second, the portfolio loan. If a buyer, or a property does not fit the Fannie Mae/Freddy Mac guidelines, for example if it’s a [inaudible: 01:49] property, if it’s a condominium building that has litigation going on, or the buyer … if the buyer has too many loans already or if the FICO score’s not good enough, than you may not be able to get a conventional home loan, but you can get a portfolio loan. A portfolio loan is a program where the lending institution will hold the loan within their portfolio. It’s not a sellable product; they will not be able to sell the loan. Those are available, but usually at a slightly higher interest rate. A portfolio loan may cost you a 1/4 point more in interest fees. Also, not every bank is offering portfolio loans, so you have to maybe shop around a little bit and find one.
Let’s talk about government loan programs; those are fabulous.
If you are a veteran, you have access to a VA loan program. Those are terrific loan programs where you can buy with zero down, 100% loan to value; means no upfront costs, zero cash. For military personnel only, including veterans, reservists, active duty personnel, and surviving spouses. VA loans are guaranteed by the US Department of Veterans Affairs.
Another government program is the FHA loan program. It’s available with as little as 3 1/2 % down payment; terrific program. You have to be a United States citizen. These programs are insured by HUD, the US Department of Housing and Urban Development.
Then there are USDA loan programs available. Those are available for rural housing areas; great programs. Zero cash down payment required, but there are some income restrictions and these programs are also only available in certain rural areas. There’s a map that defines what is considered a rural area.
Then the last loan on the list is the land loan. If you buy vacant land, it’s not that easy. You can’t just get a regular conventional loan; you would have to get a land loan. Land loans require large down payments, often 50% down payments, sometimes maybe less, but often 50% down payment. They only run for 3 years maximum term. After 3 years, you have to do something; you have to pay it off. You either roll it into a construction loan, but you cannot get a 30-year fixed loan for a land purchase.
Besides those loan programs, we need to talk a little bit about fixed-rate mortgages, adjustable rate mortgages, and maybe also about interest-only mortgages.
A fixed-rate mortgage is a mortgage loan where the interest rate stays fixed for the term of the loan, and there’s different terms available. The most common one is a 30-year fixed-rate mortgage loan, means your monthly payments stay the same for 30 years, every month. Then after 30 years, it’s paid off. It’s amortized over 30 years. 30 years done; you paid off your house. Sometimes loans … fixed-rate mortgages are available in shorter time periods, which may be amortized over 20 years, or over 15 years, and so on.
Instead of having a fixed-rate mortgage, you may be able to get a adjustable-rate mortgage. An adjustable-rate mortgage is a mortgage where the interest rate does change over time, and it’s usually tied in with some kind of index. It may stay fixed for a period of time. It may be an adjustable rate mortgage; a 7-year ARM, 7-year adjustable rate mortgage. It’s amortized over 30 years. It stays fixed for 7 years, and then in year number 8, it does adjust. Then after that, it adjusts once a year or depending on how the mortgage is written. Those are great if you know you’re not going to keep the property for a long time. There’s adjustable-rate mortgages that are fixed for 7 years, for 5 years, for 3 years, or for 1 year. If you know you’re going to keep the property only for 7 years, you might be just fine taking a 7-year adjustable-rate mortgage. However if you buy the property for a long time, forever; let’s say for 30 years, you run the risk of getting whiplash with the interest rate that would adjust after 7 years. That’s the risk. I’m almost done.
Let me talk a little about banks and mortgage brokers. We recommend to work with a mortgage broker. A mortgage broker is somebody that has the expertise and the access to shop a loan with any bank that’s out there providing mortgage financing. Banks are fairly competitive and they compete for your business, but one week one bank might have a better deal or a more suitable loan program for you as the buyer, and then next month or next week, another bank might have a more suitable program, or a special. A mortgage broker would be able to match the best program available at that particular time for you, and it doesn’t cost you anything. It’s added value at no additional cost, so that’s why we recommend mortgage brokers over going directly with a bank for the most part. That’s it for today.
Thanks, and ~Aloha.