So You’re Buying Your First Home

Congratulations! You’re ready to buy your own slice of the Hawaii lifestyle. But just for the record, many lenders consider you a “first time home buyer” if you’ve simply had no home ownership in the last three years — and it really depends on which one you choose. But whether you fall into that category, or you’re out searching for your very first plot of planet Earth that you can call your very own, there are a few special programs in Hawaii that might help you reach your goal. We hope this gives you a starting point on your journey to owning your own precious piece of these gorgeous, green isles.

Conventional Mortgages

Many first-time buyers will find that they can get a conventional mortgage with as little as a 3% down payment, provided that they haven’t owned a home in the previous 3-year period, and provided that they also have good credit, sufficient income and assets. Basically, you have to qualify for a conforming loan with Fannie Mae or Freddie Mac. More on conforming loans in a minute.

Even if you’ve owned a home before, you may also be approved for a conventional mortgage with as little as 3% down. But unlike a first-time home buyer, who has legitimately never had any kind of home ownership, a buyer with some mortgage payment history may not need to have the same assets in the bank. For a true blue first-timer without any mortgage payment history, you’ll be expected to have a buffer of cash in the bank. That buffer is generally equal to twice your monthly mortgage payment, for two months, and can be spread across all of your qualified accounts. Qualified accounts generally include vested 401(k), savings, checking, and stocks (of which 70% are usually qualified).

In addition, a first-time home buyer without any mortgage payment history, recent or long past, who is seeking a conventional mortgage will also be required to produce a verification of rent (or VOR) for their lender. Since they haven’t any history or record of mortgage payments made in a timely manner, this is one means by which lenders can qualify a potential home buyer.

Ok – back to conforming loans and a little explanation. A conforming loan means that your loan meets the criteria set forth by Fannie Mae and Freddie Mac, which are government-sponsored enterprises (or GSEs). These criteria differ slightly from those set forth by the Federal Housing Administration (the FHA). The term conforming is most often used when referring to the loan amount, and in counties across Hawaii, a conforming loan adheres (or conforms) to the maximum guidelines, or the maximum loan amounts for a single unit home when borrowing using a GSE-backed loan, or using an FHA-backed loan. More on FHA loans later, but the loan limits (the amounts that the GSEs or the FHA will guarantee) are in the tables, listed later.

USDA Loans

Aside from conventional mortgages, a great way for first time home buyers to secure financing in Hawaii is to look to some of the more rural areas of these beautiful islands. Getting out of the hustle and bustle is not the only reason to seek out the quiet lifestyle that locales like Waimanalo or the North Shore can provide. USDA loans issued under the Single Family Housing Guaranteed Loan Program allow first-time buyers to purchase with 0% down. While USDA loans require no money down, there are tighter income limits and debt ratio restrictions compared to other types of home financing options.

Obviously, rural isn’t going to include Honolulu proper, but there are plenty of desirable areas to choose from across the islands. As a first-time home buyer, a quick look at the USDA property map will give you a clearer picture of where to start searching for a home to buy. USDA financing is available to qualified first timer home buyers for up to 102% of the home’s appraised value, though you will have to pony up 2% of the loan amount for mortgage insurance as an upfront cost.

FHA Loans

The FHA, which we talked about a little earlier, is the Federal Housing Administration. It was created to encourage home ownership across the nation. The FHA has multiple programs to help refinance homes at a lower rate, to help you consolidate debt, but what we’re interested in is their First Time Home Buyer Loan.

If you’re looking to buy a home that conforms (remember that conforming loan chat we had earlier?) to the FHA maximums by county, then you can get one with as little as 3.5% down and 1.75% mortgage insurance, paid upfront. Like a VA home loan, FHA loans are guaranteed by the federal government, so often their interest rates are quite reasonable, and often lower than a conventional mortgage. However, they set maximums on the amount that the federal government will guarantee. Those maximums are listed in the table, below. A lender may be willing to lend you MORE than the maximums listed, but in that instance, you may be required to put more than 3.5% down and your lender will also want to see that you’re qualified through income, assets and credit history to make that happen for you.

VA Home Loans

The VA or Department of Veterans Affairs home loan benefit is one of the great perks of military service. Officially called the VA Loan Guaranty Program, it is afforded to veterans and active duty service members, National Guard members, and reservists. If you are eligible for a VA home loan, the federal government guarantees your mortgage, ensuring that the bank will get paid, even if at some point throughout the duration of your repayment period, you should happen to default on the loan for some unforeseen reason.

Obtaining a VA home loan offers a couple of significant advantages over a conventional mortgage. The VA home loan program allows eligible members to purchase a home often with no down payment. Though banks and lenders do need you to meet certain income, asset and debt ratio criteria, the VA itself doesn’t need to see a down payment from the buyer in order to guarantee a home loan. Since the loans are backed by the federal government, often banks and lenders can offer very competitive interest rates. VA home loan interest rates are generally lower than those for a conventional mortgage.

Again, any VA home loan generally must conform to the loan maximums set out by GSE’s (government-sponsored enterprises) – lenders Fannie Mae and Freddie Mac. Those conforming loan maximums are laid out by county in this table:

As with FHA loans, these maximums can be exceeded, but you may need to add some cash as a down payment and prove to your lender that you qualify. These maximums are simply the maximum amount that the federal government will guarantee to your lender through the VA home loan program.

So these are just some of the opportunities you can take advantage of as a first-time home buyer. We recommend that you consult with your professional realtor and shop around for the best rates and offerings. Many lenders offer other incentives to first-time home buyers as part of their suite of lending products. Again, this is an overview and we recommend that you shop around for the best options for you and your family before you set out to find just the right tropical home for you.

Additional Resources

Five Good Reasons to Get a Pre-Approved Mortgage
Hawaii Mortgages
Exploring Financing Options for Your Hawaii Home
What is the Lending Process?