Understanding Puerto Rico Mortgage Loans & its Real Estate Market.

Puerto Rico is a U.S. possession or territory. Puerto Rico's mortgage loan and real estate business is a complicated and ever-changing process. It is important that you understand how the Puerto Rico mortgage loan market works and how the lending firms earn their profits. In doing so, you will gain an appreciation of real estate mortgage loan programs within Puerto Rico and thruout the United States, and why certain home-loans are offered by certain mortgage loan properties lenders.

INSTITUTIONAL LENDERS

The first broad category of distinction is institutional versus private lending. Institutional lenders include commercial banks, savings and loans, credit unions, mortgage banking companies, pension funds, and insurance companies. These lenders generally make loans based on the income and credit of the borrower, and they generally follow standard lending guidelines. Private lenders are individuals or small companies that do not have insured depositors and are generally not regulated by the federal government.

PRIMARY VERSUS SECONDARY MARKET

First, these markets should not be confused with first and second mortgages. Primary mortgage loan lenders deal directly with the general public. They “originate” loans, that is, they lend money directly to the borrower. Often referred to as the “retail” side of the business, lenders make a profit from loan processing fees, not the mortgage loan interest.

Primary mortgage-loan lenders generally lend home purchase money to home-buying consumers, then sell the mortgage loan notes (in bulk loan packages, not one at a time) to investors on the secondary mortgage market to replenish their cash reserves.

The largest buyers on the secondary market are the Federal National Mortgage Association (FNMA or “Fannie Mae”), the Government National Mortgage Association (GNMA or “Ginnie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”). Private financial institutions such as banks, life insurance companies, private investors, and thrift associations also buy notes.

MORTGAGE BROKERS VERSUS MORTGAGE BANKERS

Many homeowners assume “mortgage companies” are banks that lend their own money. In fact, a company that you deal with may be either a mortgage banker or a mortgage broker.

A mortgage loan banker is a direct home-lender; it lends you its own money, although it often sells the mortgage loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.

A mortgage loan broker is basically a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).

CONVENTIONAL VS. NON-CONVENTIONAL

“Conventional” home-loan financing, by definition, is not insured or guaranteed by the federal government. Conventional loans are generally broken into two categories: “conforming” and “non-conforming.” A conforming loan is one that conforms or adheres to strict Fannie Mae/Freddie Mac loan underwriting guidelines.

Conforming loans are a low risk to the lender, so they offer the lowest interest rates. Conforming loans also have the strictest underwriting guidelines.

Conforming loans have three basic requirements:

1. Borrower Must Have a Minimum of Debt: Lenders look at the ratio of your monthly debt to income based on your mortgage loan application and credit report. Your regular monthly expenses (including mortgage loan payments, real estate property taxes, home-owners insurance) should add-up to no more than 25% to 28% of gross monthly income (called “front end ratio”). Furthermore, your monthly expenses, plus other long-term debt payments (e.g., student loan, automobile, personal loans, alimony, child support) should total no more than 36% of your gross monthly income (called “back end ratio”). These ratios can sometimes be increased if the borrower has excellent credit or puts more money down.

2. Good Credit Rating: You must be current on payments. Lenders will also require a certain minimum credit score called a “FICO” (http://www.myfico.com).

3. Funds to Close: You must have the requisite down payment (generally 20% of the purchase price, although lenders often bend this rule), proof of where it came from, and a few months of cash reserves in the bank.

NON-CONFORMING LOANS

A non-conforming mortgage loan has no set guidelines and vary widely from lender to lender. In fact, lenders often change their own non-conforming guidelines from month to month.

Non-conforming home-loans are also known as “sub-prime” loans, because the target customer (borrower) has credit and/or income verification that is less-than-perfect. The sub-prime loans are often rated according to the credit-worthiness of the borrower – “A,” “B”, “C” and “D.”

The sub-prime loan business has grown enormously over the past ten years, particularly in the refinance business and with investor loans. Every lender making home-loans in Puerto Ric uses its own loan approval criteria for sub-prime loans, so it is impossible to list every loan program available on the market. Suffice it to say, the guidelines for sub-prime loans are much more lax than they are for conforming loans.

Article reprinted by permission William Bronchick.

Puerto Rico Real Estate Website Editor's Addendum: Both the real estate market for home-buyers and home-sellers, and the home-mortgage-loan lending market in San Juan PR and thruout Puerto Rico are active and highly competitive. PR enjoys stable to rising property values and enjoys money-saving low-interest rate home loans, which are readily available.