Financing in Paradise: The 1,2,3’s of Real Estate Lending in Puerto Rico
By: Frank Lopez
One of the most frequently asked questions by our clients who wish to purchase real estate in Puerto Rico is whether they should limit themselves to buying a property on a cash basis, either by refinancing existing properties back in the mainland or any other source, or venturing into the local mortgage lending jungle. Although it may seem a daunting challenge at first glance, the truth of the matter is that with a minimum of due diligence performed by a buyer, it will soon seem like a very plausible option.
Puerto Rican mortgage lending falls under the domain of the United States Department of Housing and Urban Development (HUD), the Federal agency responsible for national policy and programs that address America's housing needs, improving and developing the nation's communities, and enforcing fair housing laws. For this reason, many of the products available for clients seeking to secure a loan on our island will seem very familiar to anyone who has secured a loan in the continental United States of America.
Types of Loans
Agencies such as the Veterans Administration, which guarantees their loans (commonly known as V.A. Loans) up to 100% of the sales price of the property, should it fall within their lending criteria of course, are readily available to former armed forces and some Federally employed personnel who have a valid Certificate of Eligibility in place.
Federal Housing Administration loans (commonly known as F.H.A loans) are also available within our jurisdiction. The reason why FHA loans are so popular is because borrowers that use them are able to take advantage of benefits and protections unavailable with most traditional mortgage loans. Loans through the FHA are insured by the agency, so lenders tend to be more lenient in their approval criteria. The lending loan to values are also very high topping out at ninety seven percent (97%) of the sales price or appraisal value, whichever is the lesser of the two. This allows buyers to come in to the transaction with a very small down payment, making the purchase very affordable.
Buyers must keep in mind that these types of loans are available only for purchase of existing homes that are destined for primary residence use, so second home usage will not apply for this lending product. In our area, the only condominium which qualifies for either VA or FHA loans is Isabela Beach Court, located in the area known as Villa Pesquera, located in the municipality of Isabela, Puerto Rico. Most homes within our area should qualify for either program, depending on condition, location and configuration, as well as construction materials used for their edification.
There are other products also available such as Rural Development loans, which carry many limitations and are better tailored for lower income applicants and more rurally located properties.
Other lending products available are loans backed by Fannie Mae and Freddie Mac, both of which were created by U.S. Congress. These products are known as Conventional loans, which can be used for second home properties. Their typical loan to value is Eighty percent (80%), even though combined with Private mortgage insurance, a buyer may be able to secure up to ninety five percent (95%) loan to value financing for a purchase. This can prove a more costly option, but more often than not, it is the most popular one with our stateside buyers for Second home purchases.
Another product available to buyers are Non-Conforming loans, which are offered by every mortgage bank on the island. These loans are essentially ones that do not conform to standardized lending parameters established by government backed loans (such as FHA, Fannie Mae, etc.), be it due to credit issues, condition, or destiny of the property as far as usage (commercial or investment property, among other circumstances). The loan to values are typically lower, and interest rates and closing costs are slightly higher, making this a more expensive “out of pocket” alternative.
A lesser known, but extremely convenient product, especially for land, mixed material construction or wooden homes, is the available lending products offered by locally privately owned Cooperatives. These banks are owned by stockholders who are required to become members in order to qualify for their products by way of purchasing a nominal amount of stock with the institution. These banks are under the supervision of the Corporation for the Supervision for Insurance of Cooperatives in Puerto Rico (COSEC). They have their own particular lending criteria which is analogous to lending parameters for most federally insured loan products, but in some instances can be somewhat more flexible or creative in how they grant approval for loans. We highly recommend these institutions when a client is requiring land financing, as their loan to values are up to eighty five percent (85%) with very low interest rates and terms up to twenty five (25) years for repayment. They also offer very convenient products for land and construction financing in tandem. We highly recommend the Cooperativa de Credito de Ahorro de Isabela as well as the Cooperativa de Rincón.
Types of Lenders
Lenders in Puerto Rico can be grouped into three (3) basic categories.
There are the primary lenders, which have the ability to originate, process, approve and close their own loans. Among these you may find Banco Popular de Puerto Rico, First Mortgage, and Scotiabank. In our opinion, applying for a loan with this type of lender may prove more convenient as they often have a wider array of products available to borrowers, have more locations throughout the island as well as the tendency to be more technologically inclined. The possible downside of using these lenders are that service can at times be impersonal and very bureaucratic, due to their employee hierarchy and large volume of business.
The second tier of lenders are those which have the capacity to originate, process and close mortgage loans, but who do not have the capability to approve them. These institutions offer very similar products to the primary lenders, but are slower in their approval time as they depend on the approval of a primary lender who will eventually approve and fund the loan. The service side of a loan application with these lenders is typically better than with the larger banks, and rates are almost identical in most cases. The downside, as mentioned, is the length of time required for approval, as well as the criteria imposed by the primary for said approval, which could be stricter than usual given the fact that the loan was originated and documented by a secondary lender. RF Mortgage and SunWest are examples of secondary lenders.
The third category of lenders are Cooperatives, which we have already discussed previously in this article.
It is always recommended that you become well acquainted with the array of mortgage products readily available to you either online, in newspapers or with your Real Estate professional prior to engaging on the search for your desired property on our beautiful island. This will maximize your opportunities of eventual approval, as well as refine your property search criteria considerably and make it a more efficient and enjoyable experience.
Feel free to contact us at F.L. Realty for any questions you may have in regards to financing, property search or legal aspects of buying your dream property in La Isla del Encanto.