Let me paint the picture for you. You have recently decided you need help financially, whether it is to buy your first home, buy your second home, invest or what have you. So, you decide to do a little research and get bombarded by terms like ARM, Fixed Rate, Jumbo Loans, USDA, FHA, Fannie-Mae, and the list goes on. Plainly put, the process can be overwhelming, especially if you are not as familiar with how the industry its workings. What is more excruciating? You are in Hawaii or planning on relocating there, and all you are reading is how expensive Hawaii is, and how different its market is. .
Fear not, C2 Hawaii is here to explain and define those terrifying industry words. First and foremost, let us define the difference in types of loans.
Conventional Loan: A conventional loan is a loan that does not belong to a specific government program such as the Federal Housing Administration (FHA,) the Department of Agriculture (USDA,) or the Department of Veterans Affairs (VA.) Conforming conventional loans are required to conform to Fannie Mae and Freddie Mac requirements and loan limits. Fannie Mae, or the Federal National Mortgage Association, is a U.S. government-sponsored enterprise that provides financing to mortgage lenders to provide affordable mortgage funding. Freddie Mac, the Federal Home Loan Mortgage Corporation, is a public government-sponsored enterprise meant to maintain mortgage financing in the secondary mortgage market by purchasing mortgage loans from lenders so the lenders can provide loans to more borrowers. Requirements of conforming conventional loans include the credit score of the borrower, minimum reserve requirements, and more. A non-conforming conventional loan is a mortgage that exceeds loan limits, such as a jumbo loan. Conventional loans usually offer the best interest rates and loan terms.
FHA Loans: An FHA loan is considered a type of non-conventional loan through the Federal Housing Administration. FHA loans are typically for borrowers who have a high debt-income ratio, cannot afford a high down-payment or have poor credit, though anyone can qualify for an FHA loan. FHA loans are meant to provide affordable mortgage loans and housing to those with less financial credibility, thus, the requirements are different and usually lower.
VA Loans: A VA loan is a loan for veterans, military soldiers, and spouses of deceased soldiers. VA loans offer many benefits such as easier qualification, no down payment, and lower interest rates. Borrowers with a history of bad credit due to bankruptcy, foreclosure, etc. or just poor credit in general can more easily obtain a VA loan and can do so with a shorter recovery period than a conventional loan. To learn more about VA loans, visit the U.S. Department of Veterans Affairs.
USDA Loans: A USDA loan is a loan through the U.S. Department of Agriculture. USDA loans are typically for low to moderate income borrowers living in rural areas. The USDA creates affordable housing opportunities in rural areas to promote economic prosperity and improve the quality of life in rural areas through rural development. The USDA guarantees the loan, usually resulting in no down payment and lower interest rates. To learn more about USDA loans, visit the U.S. Department of Agriculture.
Jumbo Loans: A jumbo loan is a home loan that exceeds the loan limit, making it a type of unconventional loan. In Hawaii, the loan limits are much higher than the industry standard due to the high prices of housing. As mentioned by the Wall Street Journal, the limit in Hawaii is usually $636,150 or higher, according to city limit. Jumbo loans are associated with higher risk for the lender, therefore, rates tend to be a bit higher. Additionally, the loan will be held by the actual lender of the loan and be considered a portfolio loan.
Portfolio loan: A portfolio loan is an unconventional loan and is designed to get borrowers financing for situations considered “not normal.” For example, recent credit issues, unique property types that do not meet guidelines, commercially zoned property, investment loans or loans for a foreign national are examples of outside-the-norm reasons someone might get a portfolio loan. A portfolio loan is held by the lender and is given out according to personal story and situation. Not only is a portfolio loan a way for the lender to help those in unique circumstances, but also to invest in their local economy.
Adjustable-Rate Mortgage (ARM): ARM is a loan with an interest rate that changes. ARMs usually start with lower monthly payments than a fixed-rate payment, but, monthly payments could increase dramatically even if the interest rate has not changed. Additionally, the payments could stay the same even if your interest rate decreases. Paying off your ARM early may result in fines, but the possibility of owing more than you borrowed is very real. It is important to understand ARM and how your monthly payments may change before choosing an ARM.
Fixed-Rate Mortgage: A fixed-rate mortgage is different from an ARM because the interest rate is set at a fixed amount and will not change.
Refinance: What exactly is the act of refinancing? Refinancing is an option when circumstances change and another loan is needed to change things. It is the process of swapping out loans to move the debt amount to a different lender or loan. There are many reasons people may choose to refinance, whether its saving money or obtaining lower payments.
Now that you understand the industry terms, you can more confidently decipher which financing option may be right for you on your adventures in Hawaii. If you are planning on moving here, aloha. If you still have questions, you can easily contact C2Hawaii to work with certified loan officers that understand the Hawaiian market.