Buyers' Guide

Can I buy a home in Hawaii?

Gather your pay stubs, tax returns, and account passwords; the dream of homeownership in paradise may be possible with some planning and exploration of the home financing process.

Buying a home is often one of the most significant purchases of your life, and with the average sales price of Hawaii single-family home nearing one million dollars, it definitely takes some financial savviness. The following six steps offer an introduction to home financing terms and guidance in planning for a Hawaii home purchase.

Step 1: Budget. Take a look at how much money you are making each month (your income) and how much money you are spending (your expenses). Making a household budget will help determine if you can afford a house now or how to afford one in the future.

For example, the Aloha Family is a two-earner household. Kai brings home two paychecks each month, and Pua receives one monthly check.

Kai’s First Paycheck = $2000
Kai’s Second Paycheck = $2000
Pua’s Paycheck = $4,500

Total Monthly Income = $8500

Now, record where your hard-earned money is spent each month. Kai and Pua spend a significant amount paying rent for their studio in Honolulu, giving to their church, and saving for retirement. They agreed to spend less on entertainment and clothing. Subtracting their total income from their total expenses leaves them with $3000 each month to go toward their savings account, which can be used for an emergency and to save for their home down payment.

Rent = $1200
Renters Insurance = $20
Utilities = $300
Cell Phone = $110
Charity = $850
Retirement Savings = $700
Food = $700
Car Loan Payment = $400
Car Insurance = $120
Student Loans = $200
Medical = $300
Entertainment = $400
Clothing = $200

Remaining Monthly Income Going to Savings = $3000

Step 2: Save for a down payment, closing costs, and added expenses. In Hawaii, the most common down payment amount is either 5% or 10% of the purchase price for a conventional loan; some loans, like a VA Loan, do not need any down payment, and others, need more down. For example, if you were buying a house for $700,000 and needed 10% down, you would need $70,000 for the down payment.

Tip: Using the equity on your current home, your retirement savings, or gift money, can also be an option to increase your down payment amount and secure financing or your new property. Talk to your mortgage advisor about these alternative financing options.

In addition to the down payment, extra cash is needed for closing costs. In Hawaii closing costs typically include an escrow fee, title insurance, lender title insurance, a lender fee, points on a loan (each point is 1% of the purchase price), appraisal fees, closing reserve, taxes, maintenance fee (for condo or CPR), HOA transfer fee (for condo), and other fees. For a $450,000 studio in Waikiki with monthly HOA fees of $494, the estimated closing costs are around $9,500.

Step 3: Calculate estimated home payments. An online monthly house payment calculator can help you determine how much house you can afford. Be sure to include the following, if applicable in your calculation:

• Mortgage principal and interest payment
• Property taxes
• Insurance
• HOA/condo fees
• Water, electricity, Internet, and other utilities
• Repairs and upkeep

Doing the math about all the costs of Hawaii homeownership before buying, will help to assure you make a sound financial decision. Kai and Pua could comfortably afford a $3000 home payment, leaving $1000 each month as an emergency fund along with their previously saved money.

Step 4: Know the different types of mortgages. If you are not paying cash for your home, you may need to borrow money with a mortgage loan. There are different types of mortgages: fixed and adjustable-rate; government-insured and conventional. Knowing the different types can help you weigh the pros and cons and consider which is right for your home purchase.

Fixed vs. Adjustable. A fixed-rate mortgage loan has the same interest rate and payment amount for the entire repayment term.

An adjustable-rate mortgage loan (ARM) has an interest rate that will change or “adjust” from time to time.

A hybrid model of fixed and adjustable mortgages is the 5/1 ARM loan, which has a fixed interest rate for the first five years and then adjusts every year thereafter.

Government-Insured vs. Conventional Loans. You have more loan choices besides a fixed or adjustable-rate mortgage. A conventional loan is not insured or guaranteed by the federal government but often given through private lenders, like banks.

Government-insured loans include FHA loans, which allow down payments as low as 3.5% and require mortgage insurance, VA loans, which offer borrowers 100% financing for their home purchase, and USDA/RHS loans, which are for rural borrowers who meet certain income requirements.

Step 5: Shop around for lenders or a mortgage broker. When your finances are in order and you are ready to start searching for a home, it is time to find a mortgage lender, bank, or mortgage broker. Like any big purchase, it is important to shop around and decide which option fits your needs.

A mortgage broker has several lenders to whom they can submit your loan application. They often can find the best rates and lowest fees and have better options for people with bad credit. They specialize in mortgages and are typically knowledgeable and work with a variety of loan programs. However, they may not always get you the best deal and sometimes charge higher fees.

When you work with banks and direct lenders, you do not have the middleman mortgage broker, so sometimes you can avoid certain broker fees. Since the loans are internal, processing is streamlined, and you could have the comfort of working with your own bank. However, most banks have more rigid loan programs and qualifying requirements. Also, they do not work with multiple companies, so you may not get the lowest interest rates.

Step 6: Get pre-approved. Once you’ve decided on the best lender for you, it’s time for the pre-approval process. In Hawaii, it is highly recommended to have a pre-approval letter before shopping for your first home. This letter will give a buyer an idea of monthly payments, down payment requirements, loan program terms – and it will let everyone involved in the home purchase know how much you can spend on your home, giving the seller more confidence in a purchase offer.

The following are the basic documents typically required for a loan application:

• Last two years of W2s and tax returns
• Two most recent pay stubs; or last quarter P&L statement for self-employed applicants
• 2 most recent statements for bank, retirement, and investment accounts

How much money will you be able to spend on the home? Your debt-to-income ratio (monthly credit and housing payments divided by monthly income), credit score, down payment amount, property type, and mortgage program all factor into determining your final pre-approval amount.