Down Payments on Real Estate
The down payment is the amount of cash paid by the buyer towards the purchase of real estate. The down payment plus the mortgage amount will equal the total purchase price of the property. For example, the home you want to buy is selling for $284,000 and the mortgage you have applied for covers only 90% of the cost of the home, the down payment would cover the other 10% or $28,400.
Different types of financing come with different types of down payments. Generally speaking, the Veterans Administration (VA) does not have a down payment requirement assuming the vet has full eligibility and sufficient income to qualify for the loan and the property meets VA property standards.
The Federal Housing Administration (FHA) calculates its down payment in this manner: 3% of the first $25,000 of value and 5% of the remaining value. There are currently some changes anticipated in the calculations of the FHA loan amounts so check with your REALTOR® or lender to find out the most current information.
Conventional financing, which includes 30 year and 15 year fixed rate mortgages and Adjustable Rate Mortgages, allows a minimum down payment of 5%. Depending on the amount, the down payment usually rises in increments of 5% because of Private Mortgage Insurance (PMI) rates. PMI is an insurance policy written by a private company to protect the lender against loss caused by the home buyer defaulting on the mortgage. The more you put down on a home, the less the PMI rate is, and with a 20% down payment you eliminate the necessity for PMI. With a 10% down payment on a fixed rate loan of $348,000, your PMI monthly payment would be just over $96.
For more information about down payments and mortgage programs, consult with a REALTOR®.
DownPaymentResources.com helps potential homebuyers become qualified buyers by connecting them to down payment assistance funds they may not have otherwise known existed. Winner of the 2011 Inman News Innovator “Most Innovative New Technology” award, DPR is the nation’s only web-based aggregator of homebuyer programs.
VA Loans and Qualifications
As a gesture to returning World War II veterans, Congress enacted the Servicemen's Readjustment Act of 1944, which among other benefits, authorized the Department of Veteran's Affairs (VA) to guarantee loans to eligible Vets. The original guarantee was for the first 50% of the loan amount or $2000 whichever was less. This has been increased throughout the years to the current guarantee of $50,750. The VA appraises the house and then issues a Certificate of Reasonable Value (CRV) that establishes the amount on which these figures are based. The interest rate is no longer set by the government and the payment of discount points are a negotiable item.
This program was designed to allow a veteran to buy a home with no money down. The maximum loan amount allowable is $203,000. For more information, talk to your REALTOR® or mortgage lender.
The recent explosive growth of the many alternatives for mortgage instruments is the result of changes in the way homes are financed today. During the period between the Great Depression and the early 1980's, practically all homes were financed with the use of the standard fixed rate mortgage. Today that has changed; about 20% of all homes are now financed by Adjustable Rate Mortgages (ARM's).
The standard fixed rate mortgage is a monthly amortized, direct reduction loan. This means that equal monthly payments for the loan are used to reduce directly the amount owed by first paying interest on the loan due since the last payment and then using the remainder to reduce the principal. This periodic reduction of principal combined with the fact that the borrower knows exactly how much is due each month are two of the most important features of the standard fixed rate mortgage.
The direct reduction of principal is also important for another reason. It allows for a considerable savings in the total amount of interest a borrower would have to pay if interest were calculated on the entire amount of principal, as occurs with a term loan. Thus, for the standard fixed rate mortgage, the monthly mortgage payment remains the same from first payment to last.
The ARM is basically a mortgage loan with an interest rate which is periodically adjusted to some predetermined index. Periodic adjustments to the interest rate can occur every 6 months, every year, or in multiple years. The most common period of adjustment is yearly although borrowers may select among a variety of other options. The interest rate can be based on various indices such as a lender's "cost of funds" or various US Treasury indices such as the 1 year treasury securities index. The important feature of the index is that it is an index beyond the control of the lender and verifiable by a buyer. The lender then adds to the index a "margin" which establishes the interest rate for the mortgage. There are also typically "caps" which limit the amount that the interest rate, and therefore the monthly principal and interest payment, can increase or decrease each adjustment period, as well as over the life of the loan.
There are also some other mortgage programs that while not as popular as the preceding mortgages, deserve a look. Buydown Mortgages, 5 year and 7 year convertible mortgages, 15 year and 20 year mortgages, and special state bond programs like Hawaii's Hula Mae program have all been used successfully by home buyers. Contact your REALTOR® or mortgage lender to find out more about these programs.
Federal Housing Administration Mortgage and Loan Limits
The Federal Housing Administration was created by the National Housing Act and approved on June 27, 1934. The FHA was established to encourage improvements in housing standards and conditions, and to provide an adequate home financing system by insuring mortgages. The FHA does not make loans or build homes, but operates insurance programs which provide protection against loss due to foreclosure on home mortgages made by private lending institutions.
The most common type of FHA financing is the fixed rate mortgage which is insured under Section 203B. Both fixed rate and adjustable rate programs are available. Financing is also available for attached townhomes, FHA approved condominiums, and duplexes. Check with your REALTOR® or lender for loan limits. Down payment requirements vary depending on the loan amount and are approximately 4-6% of the sales price or appraised value, whichever is lower. For specific details, it will be necessary to know who is paying what closing costs, and you will need to consult your REALTOR® or mortgage broker. The amount of mortgage insurance premium depends on a number of different factors. Check with your REALTOR® or mortgage lender for details.
FHA Mortgage Limits Increase
Effective October 19, 2005, the maximum FHA mortgage limits increased for Hawaii and Maui Counties. New limits are as follows: Hawaii County - One Family $391,850, Two-Family $441,350, Three-Family $536,250 and Four-Family $618,750; Maui County - One Family $469,342, Two-Family $575,650, Three-Family $699,400 and Four-Family $807,000. The new limits represent a 3 to 12 percent increase from previous limits that were increased in June. Effective January 1, 2006, the maximum mortgage limits also increased for Honolulu County: One Family $544,185, Two-Family $658,106, Three-Family $799,568 and Four-Family $922,578. These increases reflect Hawaii's current active real estate market. These higher mortgage limits will enable more individuals to obtain adequate FHA financing contributing to homeownership in the State. For FHA mortgage limits on the web go to https://entp.hud.gov/idapp/html/hicost1.cfm.
Another nice characteristic of the FHA instrument is that it is assumable by future home buyers if they qualify. For more information about FHA mortgages, consult your REALTOR® or mortgage lender. You can visit the US Department of Housing and Urban Development website here (select "Hawaii" from the states list, then select "Homeownership" in the submenu).
Deposit or Earnest Money in Real Property Transactions
An earnest money deposit is part of an offer to purchase real estate and is usually paid by cash or check. Your REALTOR® will hold the uncashed check until the offer is accepted or rejected. If rejected, the check will be returned to you. If accepted, it must, by law, be deposited into an escrow account by the next business day following acceptance.
The deposit amount is related to the sales price and represents serious intent on the part of a buyer to purchase property. It will be credited towards your down payment and closing costs when your final statement is prepared.
If you pull out of the sale after acceptance but before closing, your deposit may be forfeited. There is a specific paragraph on the purchase contract addressing this deposit. Have your REALTOR® explain it to you. It is important that any contingencies such as financing, be clearly written to protect your deposit.
What Is a Closing?
A closing? Scary, right? Wrong! Typically you will be working with an escrow officer who will coordinate the details for you. The escrow officer will begin with information in your contract and will have a search done on that property. It will cover things such as outstanding mortgages, liens, restrictions and easements as well as the rightful owner of the property. The title commitment or preliminary report will also show what kind of documents will be needed for the title to pass to the buyer properly.
The escrow officer will arrange to get the necessary information needed to prepare the closing papers. If a new mortgage is being obtained, the escrow officer will work closely with the lender to meet the lender's requirements as well as the requirements to assure proper transfer of title to the buyer. In addition, things such as homeowner's associations, condominium associations, termite inspections, surveys and homeowner's insurance policies will be considered.
The buyer and seller will both be advised of things they need to do during the time of this processing. If the seller needs to make his home available for an appraisal or an inspection, he will be required to respond. The buyer will need to be sure to get everything to the mortgage company that they request, or there could be delays.
Prior to closing, the buyer will be advised that a Hawaii drawn cashier's check, or wired funds in a certain amount will be needed to pay off closing costs associated with the transfer of ownership. The seller will be advised of the amount of his proceeds from the sale of his property.
Both the buyer and seller usually have closing costs. For the buyer, this means his down payment. The financed portion or mortgage and closing costs comprise the total amount he will pay to gain title to the property. The closing statement usually outlines the total costs associated with the transfer of ownership. However, if the buyer and seller have negotiated sale of other property, like pool furniture, it also needs to be paid at closing. In any event, buyers must bring certified funds to cover closing costs since a personal check is not acceptable. The closing itself usually occurs when the escrow officer, buyer with his REALTOR®, and seller with his REALTOR® meet at the escrow officer's office. the escrow officer will have all the closing documents necessary for signing. Typically, the closing statement will be explained in detail, and the escrow officer will then go on to the rest of the closing papers.
When all papers at closing have been signed and the buyer has delivered his Hawaii drawn cashier's check to the closing agent, the escrow officer will then process the necessary documents and send the deed, mortgage and other papers to the recording office. Once they are returned from recording, the title policies to the new owner and lender will be issued. Typically, the new owner should receive his recorded deed and policy 3 to 4 weeks after the closing. Whether a transaction is a cash deal or the buyer assumes the seller's mortgage, the process is the same. Ask your escrow officer or REALTOR® for a copy of the title commitment or preliminary report, the closing statement or any unanswered questions you have.
Closing Cost and Prepaid Items
Buyers and sellers of real property will encounter various closing costs in a real estate transaction. Each transaction is different and costs can be paid by buyer and seller, depending on the lender's requirements. In cash and conventional mortgage transactions, typically the seller is responsible for paying the costs of these items:
- Conveyance Tax (Transfer Tax) on the Deed - currently $1 per $1,000 of the sales price.
- Pay-off existing mortgages on the property, if any, and the recording fees for the satisfaction of the mortgage.
- The commission paid to a REALTOR® for marketing and selling the property (commissions are negotiable).
- Preliminary Title Report
- Termite inspection and clearance (price varies).
- 50 percent of escrow fee.
In cash and conventional mortgage transactions, typically the buyer is responsible for paying the costs of these items:
- Recording fees for the deed to the property and the mortgage, if any.
- Homeowner's Insurance, a one year policy (price depends on the amount of coverage and property type).
- Building Inspection if desired by the buyer (the price varies).
- Title Insurance policy.
- Hurricane Relief Fund .01 percent
- 50 percent of escrow fee
If not a cash sale, the buyer would be responsible for:
- Items which must be paid in advance like property taxes, homeowner's insurance, and Private Mortgage Insurance, if applicable.
- Loan discount points and origination fees which are costs of borrowing (figured as a percentage of the mortgage amount).
- A credit report, an appraisal, Flood Link Certification, and sometimes an application fee which are typically required by the lender or mortgage company.
There may be other fees not outlined in this discussion but nonetheless charged to either buyer or seller in a real estate transaction. Consult your REALTOR® and ask any lender to submit a truth-in-lending agreement before you borrow money to purchase a home. Other mortgage programs from the U.S. Department of Housing and Urban Development or Department of Veterans Affairs have more specific requirements.
Assuming an Existing Mortgage
In purchasing a home, you may want to consider the possibility of assuming an existing mortgage versus obtaining new financing. You will assume the term, rate and possibly the balance of the existing mortgage.
There are four basic types of assumable mortgages: conventional qualifying, conventional non-qualifying, FHA and VA. Your REALTOR® will assist in contacting the lending institution to determine the mortgage type and assumability.
Conventional qualifying mortgages require a complete credit package on the borrowers. Employment and/or credit history, with cash to close are normally verified in writing. An appraisal may or may not be necessary depending on the requirements of the lender. An application fee may be necessary to cover the direct costs the lending institution incurs for appraisal and credit reporting fees. In addition, an assumption fee may be charged to cover internal processing costs. This quote should be obtained from the lender directly. Only conventional mortgages written prior to 1973 are assumable without qualification. Fees are the exclusive right of the lender.
To stimulate interest and ease in home ownership, the Federal Housing Administration developed insured mortgages. FHA guarantees or insures repayment to the servicing lending institution, therefore opening a new market sector. FHA loans are assumable without qualification if the original recording date was prior to December 1, 1986. FHA loans made on or after December 1, 1986 may be assumed with credit qualification and acceptability by the Department of Housing and Urban Development.
The VA loan created by the Department of Veteran's Affairs benefits the veteran in purchasing a home. VA loans are immediately due and payable upon transfer of property unless the acceptability of the assumption of the loan is approved by the Department of Veteran's Affairs or its authorized agent.
Overall, all types of assumptions come under the requirements of the servicing agent or lending institution. Compare the benefits and costs to determine if the existing loan would be most advantageous to you. Remember, your REALTOR® will be happy in assisting you with your mortgage options.
Refinancing Your Home
Refinancing a home is the process of paying off an existing mortgage(s) and obtaining new financing at the current rates and terms. Here are several reasons for refinancing:
- To lower monthly payments
- To obtain cash to pay for obligations
- To obtain cash for purchases or reinvestment
- To expand the existing property
- To pay off the existing mortgage holder
Drops in mortgage interest rates may provide an opportunity for you to refinance your existing mortgage. Remember that a 1% drop in the interest rate on your mortgage may save you thousands of dollars in interest over the term of the loan.
The general rule is that it pays to refinance when the interest rate will drop by at least 2% and the refinance costs will be repaid from the monthly payment savings within 36 months. Unless you meet this general rule for financing or have a profitable exception, refinancing could be a mistake. Talk to a professional mortgage lender to see what options you may have.
Expenses for refinancing can vary among lenders by thousands of dollars. It pays to shop around. Ask a REALTORS® for recommendations about reliable lenders; the "cheapest" is not always the best. Consult at least two banks, two S&L's, and two mortgage brokers and ask a lot of questions.
You can anticipate paying additional costs to refinance your home. The amount of those costs varies between lenders. These costs include loan fees, appraisal and application fees, credit report fee, title insurance, document fees, prepaid interest.
Financing the Purchase of Your Home
There are basically three types of financing available for the purchase of your new home. Of these three, there are many programs available from which you may choose. The first type is government insured or government financing, the second is conventional financing and the third is owner financing.
Government insured or guaranteed financing includes mortgages from the Federal Housing Administration (FHA) and the Veterans Administration (VA). Also included in this group are lower interest rate bond issue loans targeted for first time home buyers at specific income levels.
Conventional financing is available in two categories: fixed and adjustable rate mortgages. The interest rate on a fixed rate mortgage does not vary throughout the life of the loan and therefore the initial rate is usually higher than the initial rate of an Adjustable Rate Mortgage (ARM). For ARM's, the interest rate varies at pre-specified periods, for example, one year adjustable. Most ARM's start off at a lower interest rate than fixed loans which make your initial monthly payments lower and have lifetime interest rate caps. You should consult your lender to make sure you understand how your mortgage works. Another method used to finance the purchase of your home is Owner Financing, often referred to as a Purchase Money Mortgage. This is a mortgage held by the seller of the property to facilitate the sale. In some cases the seller will use the Purchase Money Mortgage as an investment vehicle. It is likely that an owner held mortgage will have more favorable interest rates and terms than conventional or government loans.
Whichever type of financing you choose, get all the facts before you commit. You may obtain assistance in the financing of your home through a REALTOR®, mortgage banker, commercial bank, savings and loan association, credit union or mortgage broker.
Second Mortgage in Real Estate Transaction
With the available equity you have in your home you can obtain a second mortgage to make improvements, consolidate debt, pay college tuition, or make major purchases such as a car, boat, or anything else you desire. You can obtain a second mortgage to assist in the down payment when you are assuming an existing first mortgage.
There are three basic types of second mortgages, also known as Home Equity Loans. The most well known is the traditional fixed rate, fixed term loan. You can borrow up to a certain percentage of your home's value, less the amount of any outstanding first mortgage balance. The amount of the loan is fully disbursed at closing and your mortgage, which can be from 1 to 15 years, will depend on the program the lender is offering.
The second type is an adjustable rate fixed term loan. The only difference between this and the fixed rate loan is the periodic adjustment of the rate and payment. A variety of lending indices are used to determine the interest rate and payment amount at each adjustment period.
The third type is a Line of Credit, with a variable rate tied to a lending index such as prime rate. A certain percentage of your home's value, less the amount of any outstanding first mortgage balance, is reserved for your use. You can use the entire amount or draw on it as your needs arise. Most lenders provide checks for you to access those funds. The payment is a percentage of the outstanding balance or a minimum amount set by the lender. Latest tax revisions in most instances permit interest deductibility on second mortgage loans, regardless of the purpose, up to $100,000. Consult a tax advisor to determine how this would apply to you.
City Rehabilitation Loan Program For Owner Occupant Homeowners
A homeowner who needs to repair his or her primary home, but cannot afford the high costs, may qualify for the City’s Rehabilitation Loan Program. The program offers a low interest rate loan to low- and moderate-income qualified applicants. Loan funds can be used for re-roofing, electrical rewiring, plumbing, painting, termite treatment or any other health and safety related repairs. Improvements are also allowed to accommodate persons with disabilities.
Frequently Asked Questions
WHO CAN APPLY FOR THE REHABILITATION LOAN?
Any homeowner who has a need to make essential repairs to his or her primary home and the total household income for the residence is at or below 80% of the area median income for Oahu. The 2010 income eligibility limits are listed:
Family members in household:
HOW MUCH IS THE LOAN AMOUNT?
The maximum loan is $75,000. Loan amount will depend upon the available equity on the property.
WHAT ARE THE LOAN TERMS?
The Rehabilitation Loan term is up to 20 years.
WHAT IS THE INTEREST RATE?
Interest rates range from 0% to 2%. The interest rate will be determined on the income qualification of the applicant.
HOW IS THE LOAN SECURED?
The Rehabilitation Loan will be secured by a mortgage to the borrower’s primary property.
To obtain information on the City’s Rehabilitation Loan Program, call or visit one of the City and County of Honolulu Rehabilitation Loan Branches shown below:
51 Merchant Street
Honolulu, HI 96813
Phone: 808 768-7076
1000 Uluohia Street, #118
Kapolei, HI 96707
Phone: 808 768-3240
Additional information is also available at the City’s website listed below: www.honolulu.gov/dcs/housingloans.htm