Hawaii VA Loans

The Lesson

I learned an expensive lesson this week.  In general, for Hawaii purchase transactions, escrow fees are split 50/50, owner’s title insurance is split 60/40 and the conveyance tax is paid by the seller.  I learned that this is not law, actually just the traditional agreement as outlined in the HAR (Hawaii Association of Realtors) standard purchase contract, Section C-11.

The transaction I was about to close was an REO (bank or lender owned property) owned by Fannie Mae.  Fannie supplies their own purchase contract and within it is a section that states that, regardless of local tradition or customary practice, Fannie Mae will not pay any transaction costs nor any transfer (conveyance) taxes.  This means that the buyer is responsible for 100% of the escrow/settlement fees and 100% of the owner’s title insurance premium.

…and Even More to Learn

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es·crow (ěs’krō’, ě-skrō’)
n. Money, property, a deed, or a bond put into the custody of a third party for delivery to a grantee only after the fulfillment of the conditions specified.

First of all, what are escrow impounds and why should you care? Escrow impounds (often just called ‘escrows’ or ‘impounds’) are fees collected by the lender at closing and then each month in order to pay third party bills on your behalf. Lenders do this to ensure important bills are paid and to help budget for these payments because they are due in lump sums which are often quite large. The homeowner pays these fees each month and the bank holds them in a separate ‘escrow’ account and pays the bills when due.

Typically, for single family homes, the impounds cover the insurance and property tax bills. For condos, insurance costs are paid by the condo association and the condo fees are paid monthly by the homeowner to the condo association, so impounds solely cover property taxes.

Taxes are typically due twice a year, while insurance is paid annually. The lender does not charge for this service and often requires it. For all government insured loan programs (FHA, VA and USDA), impounds are required. For conventional loans, many lenders require it and will charge a fee of 0.25% if a borrower wants to manage these payments on their own. For a $400,000 loan that becomes a cost of $1000.

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In this current mortgage environment, the VA loan program is arguably the best loan program available to help veterans become a homeowner. Despite the fact that VA loan guidelines are generally more flexible than their conventional loan counterparts, there are still many potential pitfalls that can delay or ultimately kill your VA loan transaction. Here are the 5 most common mistakes to avoid:

Mistake #1: Putting an offer on a condominium that is not eligible for VA financing:

One thing to always keep in mind; not all condominiums (this also includes townhomes) are eligible for VA financing. I’ve seen people fall in love with a particular condo, only to find out later that the condo is not approved for VA financing. If you are certain that you will use a VA loan to finance your purchase, don’t waste your time looking at condominiums that are not eligible for VA financing.

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“What interest rate can you offer me?”  Ask any mortgage loan officer and they will tell you that this is probably the first and most commonly asked question they get from their customers.  Rightfully so, since the interest rate determines what your mortgage payment will be and, of course, we all want the lowest payment possible.

Now, this is a loaded question because one’s interest rate depends on many factors like down payment, equity in the home, credit score, property type and when you actually lock in the rate (here’s an old post we wrote on what determines mortgage rates).  Another important factor is the type of loan program you are using - a Conforming loan (a mortgage which the meets the underwriting requirements of Fannie Mae or Freddie Mac - and is most likely sold to them) or a Government loan (mortgage guaranteed by the government, most typically an FHA or VA loan).

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Having little to no money in the bank can be one of the main deterrents to homeownership. In this case, the logical option would be to rent since it would be less cost upfront, right?  Well, if you are eligible for a VA Loan, this may not be necessarily true.  Let’s do the math!

Meet Cindy, Joe & Mark

Cindy & Joe are both looking to buy a $500,000 property. Joe is eligible to finance the purchase through a VA Loan. Cindy on the other hand is not VA eligible, and will purchase via a conventional mortgage.

Now Mark is eligible for a VA Loan but feels like he can’t afford the upfront costs of buying a home right now, so he’s looking to rent. He’s looking to rent a home for about $2500, which is comparable to the $500,000 property that Cindy & Joe want to purchase (see rentometer.com).

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Right about now, you’re probably getting tired of reading headlines about how bad the real estate market is and that the financial world is on its way to a meltdown.  Me too, but there’s another side to all of this, and one that you, on main street, can turn to your advantage.  Guess who else is aware of this phenomenon.  That’s right, every seller of a home currently listed for sale.  Credit is tightening for other loan programs and, in many pockets, prices are lower than they have been in years.

As a VA eligible homebuyer, you can purchase one of these homes at a value not seen in years…and with potentially very little out of pocket expense.  How so? Not only can you negotiate on price when buying a house, there’s another tool that can make getting into a home much easier, seller credit.  A seller credit is an additional sum of money paid by the seller for you to use to pay the closing costs on your loan.  Make sure to discuss this with your real estate agent.

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