Hawaii VA Loans

There have been a lot of changes in the mortgage industry lately.   Some of the most recent changes have been in the Mortgage Insurance (MI) industry.  Private mortgage insurance is a type of insurance used by lenders to help limit losses in the event of loss or foreclosure of a loan. Lenders typically require MI for loans in which there is less than a 20% down payment (for purchases) or equity (for refinances).  The mortgage insurance company will absorb losses up to a certain percentage of the value of the loan.

For example, if someone wants to buy a house and has a 10% down payment, a lender will provide a loan of up to 90% of the value of the home.  Because there is less than a 20% down payment, the lender will require MI to cover losses equivalent to 25% of the loan amount.   This insurance for the lender is a fee that borrowers pay monthly with their loan payment.

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For those retired veterans, active duty officers or dual income families fortunate enough to afford a home beyond the limit, the VA provides a great Jumbo loan option. VA Jumbo financing is readily available for loan amounts up to $1 million with a small down payment. The down payment requirement is 25% of the difference between the purchase price and the maximum VA Loan amount at 100% financing (currently $783,750 for Oahu in 2009). So, here in Honolulu, a purchase price of $1 million, would require a down payment of just under $55,000. With a small seller credit and today’s amazingly low interest rates, you could purchase a million dollar dream home with little more than 5% to cover the down payment and closing costs.

No other program offers a Jumbo loan with that little down; and best of all, no private mortgage insurance (a monthly savings of almost $675 at that loan amount). For those fortunate enough to be able to take advantage of this program, this could be an opportune time to trade up on your existing equity.

When Congress officially passed the Servicemen’s Readjustment Act of 1944, one of the key elements in this bill was the creation of the VA Guaranteed Home Loan program. With this program, President Roosevelt & Congress wanted to make it as easy as possible for our soldiers returning home from World War II to become homeowners.

One of the biggest obstacles of homeownership for everyone is out-of-pocket expense, which includes down payment and closing costs. We’ve already discussed that you don’t need a down payment with a VA Loan since you can do 100% financing. In addition, the VA Department restricts the amount of closing costs that a VA borrower can pay - essentially breaking up the closing costs into two categories; Allowable Closing Costs & Non-Allowable Closing Costs.

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I remember when having above a 700 Fico (credit) score was superb. If you had a 720, you were in elite status and able to get the best loan rates around. Fast forward to 2008 - and a 720 Fico score no longer guarantees a borrower the lowest mortgage rates.

Here’s how this all started. In December 2007, Fannie Mae (FNMA) & Freddie Mac (FHLMC) (the two government sponsored agencies in charge of buying and selling mortgages on the secondary market which helps replenish the supply of capital in the mortgage market) implemented new Loan Level Price Adjustments based on credit score & loan-to-value.

Translation: FNMA & FHLMC implemented a tiered price adjustment matrix which increased closing costs for borrowers with lower credit scores and lower down payment. Why did they do this? To compensate for the losses FNMA & FHLMC were taking on the secondary market due to the increased amount of defaults and foreclosures occurring in the real estate market.

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When it comes to insurance (auto, health, homeowners, etc.) they all have the same thing in common: it is never fun having to pay the premiums, but always a relief when the insurance company foots the bill. But what if you have to write the check to pay the premiums, yet you are not the one being insured?

This is the case with Private Mortgage Insurance (PMI). PMI is insurance the lender requires their borrowers to pay when they don’t put a minimum of a 20% down payment on a home purchase. Not to be confused with homeowners’ insurance, PMI does not insure the homeowner, instead – mortgage insurance insures the lender in the event the borrower goes into default and the lender needs to foreclose on the property. In this circumstance, PMI insures the lender (up to a certain percentage of the loan) to offset loses incurred during the foreclosure process.

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The last 5 years or so, finding financing to purchase a home with no down payment was relatively easy - granted you had a decent credit score. There were an abundance of 2nd mortgage products available so you can do an 80/20 loan (80% first mortgage and 20% 2nd mortgage) and avoid paying Private Mortgage Insurance (PMI).

Now if you didn’t want to pay the higher rate with the 2nd mortgage - you could just do one loan and pay the PMI. The PMI would add a few hundred dollars to your monthly mortgage bill, but at least you didn’t have to place a hefty down payment to buy the property.

Well things have drastically changed over the last 6-8 months. The lax mortgage lending guidelines that were in place during the recent real estate boom we’ve experienced has finally caught up with many lenders. Even with Hawaii’s real estate market not seeing the same dramatic drop in values as the case with most cities in the continental US - we are still affecting by this.

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