New Developments Guide
Learn everything you need to know about new construction on Oahu.
You’ve weighed the pros and cons of purchasing a presale new development home. You’ve identified your needs and wants for the property. And now, you have found the perfect place – whether to live in or to use as an investment property – in a new Hawaii development.
Purchasing a new development property in Hawaii is often different than purchasing a resale property – and from purchasing a property elsewhere in the world. How does the buying process for new Hawaii developments work? And, what is the typical financing process with lenders? While some new development projects in Hawaii differ in how they are financed, typically the vast majority of new developments, including those in Kakaako, follow a similar payment schedule, loan precertification and final approval and overall escrow timeline and protocols.
Note that when purchasing a new development property, it is recommended to work with a real estate agent who is knowledgeable, as the projects do have sales team members themselves; however, those people are trained to only sell their own projects. It’s also important to note that typically the developers pay the buyer’s real estate agent, not the purchaser themselves, so working with a real estate agent who has your back through the buying process is usually completely free for the buyer.
Once you have identified your new development project that you want to purchase, you can expect to follow these steps to finance the presale home purchase.
You’ve chosen your new development project and decided which unit has your desired space and floor plans. Next, get ready to purchase – and quickly.
First, review and sign the purchase contract; sometimes, this contract can be more than 50 pages long, and sometimes the developer gives a specified amount of time to sign to secure the unit – ranging from hours to days. When the contract is submitted to the developer, a 5% deposit of the purchase price is also required. This money will be held in escrow and will go towards the final financing of the home purchase.
After the contract is signed and the initial 5% deposit is made, the developer will give the buyer a number of documents, including a public developer report and any general condominium/homeowner’s association documents. Next, a 30-day recission period, which is mandated in the state of Hawaii for the purchase of any new construction, is granted to the buyer. During this time, it’s important to review all those documents (including the purchase contract if you didn’t have time to read it thoroughly). If you decide to cancel during the 30-day recission period, that is allowable for any reason.
Typically, during (and sometimes before or after) the 30-day recission period, you will need to submit a pre-qualification letter from one of the developer’s chosen/preferred project lenders. Why do you need to get prequalified by a preferred lender? The pre-selected project lenders understand the project thoroughly and can prequalify buyers based on the development’s requirements and guidelines; the developer’s chosen project lenders have been trained, and they know the set rate(s), criteria and any state-regulated/affordable housing guidelines, such as those from HHFDC, HCDA or DPP. Note that these initial interest rates you are qualified for in the initial prequalification letter are not necessarily the final rates (They are usually higher to mitigate the bank’s risk.). And, closer to the project completion date, another requalification with final interest rates will occur. (Keep reading the below steps!)
Who usually are Hawaii new development preferred lenders? The projects lenders vary from development to development, but each new development usually has a list of lenders that most often includes all the big banks in Hawaii, like American Savings Bank, Bank of Hawaii, First Hawaiian Bank and Central Pacific Bank. An in-house portfolio loan by a local bank is something to consider for buyers who are unable or unwilling to utilize a conventional loan.
In addition to submitting the prequalification letter from the preselected project lender, a second 5% deposit will need to be made before the end of the 30-day recission period – if you’re satisfied after reviewing of all the documents. Once you put this second 5% deposit down, this signifies a commitment to closing the deal, as there will no longer be any rights to cancel without losing the deposit money. This time of the second deposit might be unsettling for some buyers, as the construction might not be complete and the unit ready for move in for many more years. However, presale buyers in new Hawaii developments often always benefit from appreciation of the deposit money during the construction phase, as well.
Usually either 120 days after the contract signing or 90 days after the end of the 30-day rescission period, an additional 10% deposit is due – making the total deposit down 20%. So, while the deposit schedule does differ between the new development projects, the typical timeline is as follows:
All 20% of this deposit will be held in an escrow account by an independent third party. Escrow acts as the safe keeper of the funds.
About one year before the expected construction completion date – also known as the expected closing date – new development homebuyers will often start to receive mortgage interest rate offers from local banks. These banks will target you to lock in rates with them, and, although it is not required to commit to any of these rate or banks, if a buyer thinks the rates are desirable, they can commit to that bank and interest rate. To lock in the interest rate, the bank will typically require a deposit, since the bank will then set aside money for the final home purchase.
Around six months prior to closing, a lender will need to be selected – and, for many new development buyers, it often is a lender from the developer’s preselected/preferred lender list (if the buyer isn’t paying in cash). The developer will request documents from the buyer’s selected lender, including a pre-approval/recertification letter and conditional loan approval; the buyer will need to provide a variety of documents to obtain a conditional loan approval, like during the initial prequalification phase. Proof of funds documentation will be requested by the developer for any cash buyers.
About two months before closing, a final loan approval will be submitted to the developer. This is what your actual interest rate and true monthly payments will be.
What if you lose your job between the time when you signed the purchase contract and put down the 20% deposit and when the new development is fully constructed? Since the span of when the purchase contract is signed to the final closing could be a few years, this is a concern for some buyers, especially if they aren’t cash buyers. The contract with the developer typically does not have any financing contingency on the purchase, meaning if you can’t qualify for the final loan, you most likely will lose your 20% deposit. Some developers might choose to delay the closing or work with the buyer, but they do have the right to keep your deposit – a con of purchasing a presale in a new development.
About a month before closing, as specified in your purchase contract, most developers will require the lender (or the cash buyer themselves) to fully fund the purchase of the new property in the escrow account. For non-local banks, this is not a common process to fully fund a property purchase a month before it closes; this is another reason why it is exponentially more popular for a new development homebuyer to work with a local preferred lender – which often give the best interest rates, either way.
After the home purchase is fully funded, the homebuyer can look forward to the day when those keys are finally in their hand and they can move in to the brand-new home. But, like the purchasing and financing process themselves, more patience is required. However, knowing the general timelines can ready homebuyers for finally securing that ideal new development home.
Learn everything you need to know about new construction on Oahu.
What factors should you consider when shopping for a new home?
Weight the pros and cons between buying a new or existing home.
Your home is built and ready. Learn the final steps to move-in.