Part 1: Qualifying – the First Step in Home Buying in Hawai’i

The first step in buying a home in Honolulu or anywhere in Hawaii is always to find out what you have to work with.  Your Realtor can recommend several lenders to help you assess your mortgage needs.  In this step a lender will help the buyer figure out the amount that the buyer is qualified to borrow, and determine any options available to the buyer to increase borrowing power. Alternative lending programs, such as those backed by the Federal Housing Administration (FHA), the Veterans Administration (VA), and The Federal National Mortgage Association (Fannie Mae) will be briefly explained to show the qualifying options available to the borrower.

Although a  general pre-qualification is the minimum needed, in the market today a Pre-Approval both lets the seller know you are serious and lets you know exactly what you have to work with.  Selecting a lender familiar with Hawaii’s particular land laws to help you find the right loan to fit their personal needs is critical. Too often the mainland or online lender quotes seem wonderful until it comes to their attention that the lot sizes and residence sizes in Hawaii don’t meet their lending criteria.  Usually this happens at the end of the process, so even if you choose them because of their low rates, you should have a backup relationship with a local lender.  This step will help you determine what type of loan is best-suited for your financial and personal situation. Click here for local lender recommendations.

In order to help illustrate the four steps of the process we will use a hypothetical potential buyer – Kane and Leilani Makai.

Our buyer, Kane, is in a dilemma. Kane and his wife have just found the house of their dreams. The house cost $729,000 and is just the right size, close to his job, in an affluent community and has a fenced-in back yard. This probably doesn't sound like a dilemma to you. As a matter of fact, it wasn't a dilemma for Kane until he received a letter from the bank. Although Kane had always paid his bills on time and achieved a good credit status, he was distressed to find out that his income was insufficient for the loan amount requested. To make matters worse, the owner of the house is in a hurry to sell; and with potential buyers visiting the house on a daily basis, Kane is frantically searching for a lender that will accommodate his situation.

Poor Kane made a mistake that is frequently made among home buyers. Kane looked for and found a house in Kailua that he thought he could afford, but couldn't. Kane should have gone to a mortgage broker or local lender first to determine what size mortgage he could afford.  You would be surprised how many lenders are willing to assist you in the hopes of getting your business. We have lenders that will help you work on your credit scores too.

Luckily for Kane, he was referred to such a lender by his Realtor®. The lender informed Kane that the financial industry uses basic guidelines to determine your maximum mortgage value. One such guideline is the percent ratio to compare your gross income before taxes to your expenses. The first number of the ratio is the maximum percent of Kane's and his wife's gross income that should go for housing expenses. These expenses are referred to as PITI payments - Principal, Interest, Taxes, Insurance.

The second number is the maximum percent of Kane and his wife's gross income that should be allocated to all of their credit expenses (including housing expenses, and any installment debt (i.e credit cards, auto loans).

The loan officer will calculate, given Kane’s income and expenses, the amount he could get a mortgage on.  Most mortgages require a 20% or larger down payment – but if you haven’t used and are eligible for a VA loan, no down payment is required, but you are still limited to the PITI amount you can afford.

Given Kane's $2,500/mo. mortgage limit, he could afford a $500,000 mortgage with a 20% downpayment which means he can afford a $625,000 home. (The principal and interest payments on a $625,000 mortgage for 30 years at 4.5% are $2,533.43 with a $125,000 down payment per month).

The problem is that the mortgage on Kane's dream house (with 20% down) is $583,200. The monthly payments on a $583,200 mortgage for 30 years at 4.5% would be $2,955, after a $145,800 down payment.

With the current financial market conditions, this is where an experienced mortgage officer or broker can be invaluable.  Not only will they advise you up front about possible loan options and amounts you have to work with, they will diligently search for the best mortgage for your particular needs.

Other things to think about:

1. Check into FHA programs (that are insured by the Federal Housing Administration) that use a more favorable ratio percent. Check with your lender for the current ratios and caps.
2. Check into Community Homebuyer programs (loans that are funded by the state government and sponsored by the Federal National Mortgage Association) that offer even more lenient percentages. As with all programs, check with a lender for current caps and availability.
3. Although the initial rate on adjustable rate and balloon programs (if any are available) are lower than fixed rate programs, at a later date, the interest rates on these loan programs could very well increase above the rate of a conventional 15 or 30 year loan. Balloon Rate mortgages are much of the reason for the housing and credit meltdown.  An experienced loan officer will help you avoid buying into a loan that will threaten your financial security or into a Graduated Payment program that can actually add to your outstanding loan balance (negative amortization).
4. Try to find a lending institution that makes portfolio loans or in house loans. Since these institutions are using their own funds to back the loan, and only have to conform to their underwriting requirements, they may have more flexible guidelines for borrowers.
5. Consider asking the seller to “hold some paper” on the sale.  This could be an Agreement of Sale or a Purchase Money Mortgage set up to let you seller-finance the down payment or the down and the mortgage for a period of time when financing the loan would be more feasible. Sellers facing mortgage problems may be more open to this route that putting their house on the market in a “Short Sale” situation.

The final decision to see if the Makai's income-to-debt ratio is acceptable is up to the underwriting department of the financial institution. The underwriters will check to see if their income is stable and increasing on a steady basis, and if his down payment is substantial enough. Contact our team for suggested loan officers for your home buying needs. 

Be sure to read our next issue, when Kane learns about the second step in buying a home in Hawaii. Now that we know what the Makais have to work with, we need to help them select the best property.  Click here for Part 2, Selecting the Right Property.

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