Mortgage rates remain at record low rates making home ownership an attractive but sometimes stressful choice for first timers.  Over the past 6 or so years, rising prices have added to the intensity. If you have tried unsuccessfully to buy in the past, you probably experienced some frustrations. It was like jumping onto a moving vehicle – it’s great once you get on, but until then you’re chasing a speeding target!

Down Payment Minimizers
Cash down payment is one of the biggest barriers to purchasing a home in Hawaii.  It’s nearly impossible to save up enough money for a traditional mortgage, which requires 20% of the purchase price plus closing costs. The most favorable loan terms are reserved for people with good credit scores and enough cash in the bank for down payment plus all the loan costs and fees. 

Competition in the marketplace has created programs that minimize the need for a substantial down payment and big-bucks closing costs. Borrowers may now benefit from  3 percent, 5 percent,  or 10 percent down payment programs and still have several choices. You may not have to put anything down at all on Federal Housing Administration (FHA) or Veterans Administration (VA) loans if you qualify and the home you select fits the criteria. Home buyers may also benefit from special first-time buyer programs, down payment assistance programs, and special options offered by lenders.

Know Your Credit Rating
The best loans at the lowest interest rates go to borrowers with excellent credit. It’s a good idea to have your lender preview your credit report to see if there is anything on it that needs to be corrected.  Some people worry that having their credit checked will in itself cause a “red flag” on their record, but this is not true if it is done by a reputable lender. In fact, until your credit is examined, no lender can really tell you what interest rate or loan programs they have available for you. 

Many other factors go into how strong you will look to the guys with the purse strings – factors such as stability of employment, current housing situation and cost, other debts, and of course your income as reported on your tax returns.

The Market Rules
The real estate market as a whole will also affect your choices.  Hawaii has experienced a fast and furious “sellers market”, which is now leveling out with more balance between buyers and sellers. Buyers are expected to have their financing all lined up before they shop for homes. Any offer to purchase that is not accompanied by a written pre-approval letter will look weak.  The seller has no way to know if you really are qualified for the financing you need. Also keep in mind that your offer will be judged by the amount of the deposit you have.  It is customary to offer $1000 - $5000 as an initial deposit and another 2 – 4 % as additional deposit within the next 2 – 3 weeks, all of which goes towards your down payment. Some sellers will accept less depending on the advice their Realtor, and how anxious they are to sell.

If you are planning on a no or low down payment loan, remember that you still need some cash to bring into the purchase upfront to assure the seller that you will go through with the deal. Your real estate professional will be able to advise you on what is needed in your case, which varies according to neighborhood and price range.

Calling All Rich Uncles
If you need cash to make your purchase, it is worth checking out all your choices. Where to get it? 

Many young Hawaii buyers need family help to get started on home ownership. Some parents want to help their kids with a gift of down payment cash, sort of an advance on their inheritance. Explore all your options but talk to your lender, Realtor or financial planner first, as there are many rules that must be followed for the most advantageous loan or gift.

Relocating buyers are often able to receive assistance from their employers – be sure to ask. There are situations where life insurance and retirement account funds can be borrowed and used for home purchases.

Plan Your Strategy
Financial planners say buyers should put off vacations, sell some assets, get a loan or an outright gift from a family member, and most importantly, avoid making major purchases such as cars, big screen TVs or increasing credit card debt before buying a home. Borrowing money to buy a vehicle is a big error young buyers sometimes make – and will greatly reduce your home choices if you are short of funds. First things first – a home you can live in that will likely appreciate in value, rather than something that drops in value the minute you drive it off the lot! Get your finances in order first for the best mortgage choices.

Get Creative
Equity sharing is one alternative to those who wish to become homeowners but are short of cash. The key to this strategy is having a partner with the needed cash. This investor provides the down payment and many times this partner is a parent, friend, or relative. Meanwhile, the buyer lives in the home and pays the mortgage. The home is sold or refinanced after an agreed upon period of time at which point the investor and homeowner split the equity, usually evenly. The goal is for the buyer to benefit from tax deductions and appreciation, ultimately refinancing and buying out the investor. Meanwhile, all parties benefit from the agreement. The buyer is able to own a home without a down payment, the investor earns a return on the investment, and both can take advantage of tax deductions. The investor, for instance, can deduct homeowners' insurance and dues payments. Both can deduct property taxes, and the buyer can deduct the mortgage interest. A written agreement drafted by an attorney is crucial to specify the details.

Other Creative Ideas: Lease Options are rental agreements with a lump sum of money paid to the owner in advance in addition to the rent. It requires an Option Agreement which allows the renter to be first in line to buy at a predetermined price within a stated period, perhaps a year or two. This works for people who expect to be in a better position to buy later, and requires a seller who is not in a hurry.  If the purchase is completed, the “option money” goes towards the purchase; otherwise, it reverts to the seller who then has to find another buyer. It is unusual because it offers few advantages to a buyer who knows he wants to buy, and is not so great for a seller either, who has to wait for the Option Period to end before he knows if he has a deal.

Rent to Own is another idea that has not achieved much success in Hawaii. In areas with many homes for sale and few buyers, this is often advertised to attract renters to a possible future sale. Very few sellers want to wait for a renter to possibly buy at a later time.

Seller Financing
This is a rare bird, and has seldom been seen in Hawaii in recent years! But if and when the market changes and the supply-and-demand balance truly turns, seller financing may become more available.  This type of financing is generally is offered only when a sale cannot be made otherwise. This may happen if the property is not appealing to a many buyers, has a short land lease, or other negative qualities.  It also becomes attractive when high bank interest rates keep borrowers from being able to quality, such as occurred in the early 1980s when bank rates were at around 14%.

There are several types of seller financing, which may be called a “purchase money mortgage”, “land contract”, “agreement of sale” or “seller carry back”. The interest rate may be higher than what is offered by the bank, since it is considered to be somewhat riskier. No one wants to have to seek legal recourse on a buyer in the event that they stop making the mortgage payments. Under certain circumstances there may be benefits to the seller to “become the bank” for purposes of selling their property.

New home developments may offer special financing with more favorable terms. This helps them compete with other homes in the area and achieves their need for a cash stream to apply to ongoing construction. This financing package could include liberal qualifying guidelines, reduced down payment, and financing for additions and improvements such as upgraded flooring, appliances, landscaping packages, and window coverings, and decorating. Normally it is offered through local lenders.

Problems on the Horizon
An open marketplace for creative mortgages brings out unscrupulous practices, and what is called “predatory lending”. Risky loans to unqualified buyers have offered low “teaser” rates, which can escalate to very high levels. Many borrowers do not realize that their payment does not even cover the finance charges, so as each month passes, they actually owe more and more. If property values fall, as they could in some areas, these people may be unable to pay off their mortgage when they sell. There are strings attached to all this “easy money”!

Latest Scandal
In some parts of the country, foreclosures have started rising due to some of these tricky mortgages coupled with falling prices. Large lending institutions have actually gone out of business because of this. Lenders are starting to be more conservative with the more creative mortgage products, and more selective with whom they will lend to. The “no documentation” loans are becoming scarce, as are the “no down payment” products offered to people with poor credit. There are still dozens of choices available and a mortgage available to just about anyone who can afford the payments. Folks with poor credit will have fewer choices and may need to work with a lender to “tune up” their credit report in order to be in a position to buy.

Too good to be true?
Be suspicious of mortgages that sound ‘too good to be true. The “mortgage rush” has brought out some fly-by-night companies that will promise what they cannot deliver. That’s why it’s a good idea to consult with your Realtor to get names of reputable local companies that offer good rates and follow ethical business practices. Just because they advertise on TV doesn’t mean they will do what they say (remember the “Publisher’s Clearing House scandal?), and how do you chase down a fraudulent Internet lender? Always get a written and detailed “Good Faith Estimate” of any mortgage that you are considering before you make a decision or spend any money. Stop Mortgage Fraud is a new initiative by the Mortgage Bankers Association of America to crack down on lenders engaged in abusive lending practices. This program features a Web site, www.stopmortgagefraud.com which is endorsed by the U.S. Department of Housing and Urban Development. Consumers can use the site to obtain information, file a complaint, or report abusive practices.

Go For It!
Low interest rates make now a great time to buy with typical mortgage payments below the levels they were when prices were higher. The first step is a consultation with the best real estate professional you can find. If you email me I will be happy to provide you with a list of reputable lenders and additional tips on getting started on home ownership.