Arabel L. Camblor, R, ABR, GRI Broker-In-Charge, Hilo

If you’re serious about beginning a home search, you have to be ready to commit to the process of finding the right financing. Lending criteria can change on a daily basis, so as you go into the process, you, your Realtor® and your lender will work together as a team until the last document is signed at the closing table.

Step 1: Pre-Qualification

The first step in securing a mortgage is to obtain a pre-qualification letter. Pre-qualification gives you a clear picture of your financial parameters and a maximum home price that will fit your budget. Your loan officer will give you an opinion of your borrowing ability based on information that you provide. Lenders will ask about your debts, your sources of income, your savings and whether you have a down payment ready.

Don’t forget, pre-qualification is just a quick peek into your financial picture to assess your borrowing strength. Why spend hours of your valuable time walking through dozens of homes or looking at hundreds of listings online only to find out you can’t afford the house that you have fallen in love with?

Step 2: Pre-Approval

Once you’ve established a target monthly payment amount, then your loan officer will ask you to complete an application, pay a fee and provide all the documentation necessary to successfully process your request for a loan.

You will give your mortgage lender information on your income, your assets and your liabilities, including debt. All the information you provide will be checked carefully and your credit report will be obtained–all these numbers are crunched to establish your credit-worthiness.

This stage takes a little longer than a simple pre-qualification, but the pre-approval letter carries much more weight than a pre-qualification letter in a seller’s mind because the seller knows the lender has already verified your finances. With a pre-approval letter, you are in a much better position to negotiate the price for the house of your dreams.

Step 3: Conditional Loan Approval

It is important to remember that you are not guaranteed to get a mortgage if you are pre-qualified or pre-approved. Now, the focus becomes the house itself.

Once a price has been negotiated and agreed upon for the home you’ve chosen, the Purchase Contract is given to your lender for review. You now must wait for the conditional loan approval. An appraisal of the home is ordered to get a professional appraiser’s opinion of value. Then, an underwriter reviews your loan application. This could take three to four weeks.

When it is determined that all the numbers and details meet the requirements of the lender, a conditional loan approval will be issued. Even at this stage, there will likely be a short list of required items, including further documentation of income, an update to your credit report, a final verification of your employment or a satisfactory review of an appraisal. Hopefully, there will be no surprises here. During this time, don’t make any major purchases!

Step 4: Final Loan Approval

Within a short time period, you should be able to satisfy, or remove, any last conditions and proceed to close. Once the conditions are satisfied, the lender will issue a final loan approval. A date will be scheduled for you to sign all of the official paperwork for the loan and the documents for the purchase of your home. In Hawaii, this happens a few days before the Bureau of Conveyances records the transaction, so it will be a couple of days before you get the official word that ownership has transferred.

Knowing ahead of time what to expect and working with a team of real estate professionals you trust (your Realtor®, your lender, your escrow officer and, if necessary, your attorney or tax adviser) will make the process of financing and buying a home less stressful. Once you’ve closed and have the keys to your new home, the waiting will all feel worthwhile!

This article originally appeared in Waikoloa Whispers, a privately-owned publication distributed to Waikoloa residents.  Posted here with permission from the Editor, Phyllis Ann Knauf…Al assures us he asked!

Al Knauf R(S) Kohala Coast Mauna Lani office

Part 1: Mortgage Plans to Consider
Part 2: Waikoloa Village Real Estate Update – May

Mortgage Plans to Consider

30-Year Fixed Rate Loan:  The 30-year fixed-rate loan is the most traditional and conventional product on the market.  The interest rate associated with the loan is “fixed,” which means that it will not change over the course of that period.  The loan payment never changes.

Adjustable-Rate Mortgage:  An adjustable-rate mortgage (ARM) still has a place in mortgage financing.  This is a mortgage that changes rates over the course of the loan.  The initial term is 1, 3, 5, 7 or 10 years.  The interest rate then changes to a higher rate.  An adjustable-rate mortgage can be right for buyers who want a lower payment now, even though they can afford a higher payment.

Convertible Mortgage:  These are ARM loans that allow you to covert to a fixed-rate loan at or before a specified time.  It lets you start off with a low variable rate, then lock in a fixed rate at a later date.

Interest-Only Mortgage:  An interest-only mortgage is a mortgage where the buyer is only paying the interest on the loan every month.  Most interest-only loans will, at some point, require the buyer to start paying down the principal; however, for the interest-only period (which could be as long as 10-years), the borrower only has to pay the interest to the bank.  At the end of the interest-only period, the buyer owns very little, if any, of the home.  If real estate values rise, the homeowner might be able to make a profit.  However, if values drop, the homeowner could end up with no equity in a house worth less.

Why consider an FHA loan? An FHA loan may be a good choice for people at all income levels.  It requires a down payment of only 3.5 percent.  FHA terms allow you to include closing costs into the mortgage.  In later years, it provides cash-out refinancing for things such as college or home improvements.  As with any loan on which the down payment is less than 20 percent of the home’s value, mortgage insurance is added to the monthly payment.  In addition, 1/12 of the annual homeowners insurance and property taxes are added to the monthly payment.

Waikoloa Village Stats for May

RESIDENTIAL:

Available: 60  Last report: 74  Lowest: $199,000  Highest: $795,000
In Escrow: 27  Lowest: $179,000  Highest: $649,000
2010 Sales: 25  Lowest: $239,900  Highest: $518,000

CONDOMINIUMS:

Available: 50  Last report: 61  Lowest: $89,000  Highest: $635,000
In Escrow: 16  Lowest: $83,900  Highest: $325,000
2010 Sales: 10  Lowest: $89,000  Highest: $380,000

VACANT RESIDENTIAL LOTS

Available: 20  Last report: 22  Lowest: $69,000  Highest: $425,000
In Escrow: 7*  Lowest: $99,900  Highest: $120,000
2010 Sales: 8  Lowest: $72,000  Highest: $102,000

*There is one additional lot in escrow consisting of 12.28 acres along Eleele Street that has “preliminary approval and engineered for a 22-lot subdivision.”

Note: Numbers above based on MLS data as of 5/29/2010.  Al’s Waikoloa Whispers article also contains 2009 sales stats for comparison.  To receive a copy of the printed article, please email Al.  For inquiries about Waikoloa Whispers, please email whisperswaikoloa@aol.com.

Hidden fees, bait-and-switch tactics, misrepresentation, non-disclosure.  These unethical lending tactics (as well as discrimination, predatory lending practices and, of course, old-fashioned, straight-up fraud) are pitfalls that may derail a well-intentioned buyer’s effort to successfully obtain a loan for a new home.

To protect buyers from these types of practices, laws exist that require lenders to provide very specific information to loan applicants early in the application process.  You may have noticed recent headlines announcing changes to some of these rules, so we want to take a closer look at what you should expect–and what you should watch out for–if you are starting the process of shopping for a loan.

First, the Background

• What is RESPA? The Real Estate Settlement Procedures Act was passed in 1974.  The purpose of RESPA is to help consumers make the best possible decisions about the loans they choose and to eliminate some of the unethical practices that raise the cost of obtaining a loan.  This is the law that requires lenders to give you certain documents at the time you apply for a loan.
• What is a GFE? The Good Faith Estimate is one of the required documents that you, as a buyer, receive at the time you submit a loan application.  This document lists the charges the you pay at settlement (at the closing table), including the costs the lender charges you to complete your loan process.  The GFE has undergone a revision recently that is intended to provide buyers with a clearer understanding of the charges associated with their loan and the fees for which they will be responsible at closing.

What to Expect from Your Good Faith Estimate

When you apply for a new loan, you will receive a GFE either immediately from your loan officer or within three days from the lender.  (Keep in mind that getting a general pre-approval is not the same as officially making application for a loan.  Be sure to discuss the process with your Mortgage Loan Originator.)

The new rules require that any lender fees be the same at closing as they are on the GFE you receive upon completing your application.  Costs associated with title insurance and closing fees can increase by no more than 10%.

Beware Attempts to Side-Step Regulations

Those who monitor the industry are reporting that some lenders are providing their clients with documents that are not official Good Faith Estimates, calling them “work sheets” and “loan scenarios.”  These types of documents are not subject to RESPA rules, so be very cautious about making decisions based on them.  Once you complete an official, full application, providing the lender all the information that they require, you should then receive your GFE.  Only then can you expect to be protected by the RESPA rules.

Resources for More Information

The US Department of Housing and Urban Development website has several resources that you can explore before meeting with a lender.  And, of course, your Realtor can also provide guidance through the process.

Here are a few links to get you started:

Looking for the Best Mortgage:  Shop, Compare, Negotiate (this a PDF booklet with worksheets from www.hud.gov)

Understand Your Borrower’s Rights

Protect Yourself from Predatory Lending Practices

That being said, this is definitely not for everyone and requires solid financial guidance from a qualified estate or financial planner.

Depending on the length of the mortgage, the interest rate could be as low as 2.63% and could be increased from there depending on the needs of the parent and child. Tax advantaged inheritance goals can also be accomplished by forgiving portions of this debt each year, being careful not to exceed gift tax maximums. Depending on the number of people involved this could amount to as much as $52,000 per year where both parents are gifting to their child and spouse.

It goes without saying that the parents must look out for their own financial best interests first and must have trust and confidence in their heirs’ stability and ability to meet their financial obligations. Fortunately, a properly secured mortgage can offer significant protections to the parent’s assets; however, parents still have more of a need to be cautious and prudent than the bank when considering this alternative.

There are many other important concepts and considerations that must be reviewed with an expert financial or estate planner before anyone should consider this option. However, the rewards can be significant for both parent and child and are well worth considering, especially during our current buyer’s market where pricing is becoming so attractive.

P.S.  I forgot to mention; the interest payments the kids are paying to Mom and Dad can also be tax deductible!

This is especially important for anyone considering purchasing property on the Big Island of Hawaii. Here is one test for anyone thinking of using a mainland lender: when interviewing, ask your loan officer if he/she has ever successfully completed a loan for a property in a Lava Zone (yes, all properties on the Big Island fall into an assigned Lava Zone designation–and this is often a surprise to lenders who work outside Hawaii Island). If this is an unfamiliar concept for your lender and the underwriters with whom he/she works, then you can expect that you may have unnecessary delays throughout the escrow process when other issues unique to Hawaii arise. There certainly have been cases where transactions have fallen apart because Sellers give up on a Buyer who has requested numerous extensions while working with lenders unfamiliar with the ins and outs of Hawaii’s real estate market.

There are numerous local lending institutions and mortgage brokers on-island and ready to serve you–and your Realtor will be happy to provide you with referrals for lenders who understand the area where you are concentrating your property search. As a Buyer, consider interviewing a few local lenders to see who can best meet your needs—in the end, it may mean the difference between a lost opportunity or a successful close!