The good news is: even if you don’t have a full 20% down to put on your Hawaii dream home, you still have lots of options. We work with people who have just 15%, 10%, 5% or nothing to put down every day!
Here are several ways you can get a mortgage with less than 20% down:
VA loans.
If you’re a qualifying veteran, you can get a mortgage with no down payment. There’s also no private mortgage insurance. The Veterans Administration recently increased its loan maximums for Hawaii. As of 2019, you can borrow up to $726,525 to buy a home anywhere in Hawaii.
Do keep in mind that with VA loans, you can expect to pay a ‘funding fee,’ usually between 1.25% and 3.3%, depending on your status and the down payment. The nice thing about a VA loan, though, is that you don’t have to pay the funding fee up front, in cash. You have the option of rolling the funding fee into the loan.
For down payments of 0 to 4.9%, active duty component borrowers should expect to pay 2.15% in funding fees for the first use of their VA benefits, and 3.3% for second and subsequent loans.
For Reserve component members, including those in the National Guard, expect to pay a funding fee of 2.4% for the first use of your benefit, and 3.3% for second and subsequent VA mortgages.
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“If you’ve been waiting until you have 10%, 15% or 20% down to buy your dream home,
you can stop waiting, and act now.”
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Exceptions.
You are exempted from the funding fee requirement if either of the following conditions apply:
• You are entitled to or receiving VA compensation for a service-connected disability,
• You are a surviving spouse of a veteran who died in service or from a service-connected disability.
Note that even if you pay the funding fee up front in cash, it’s still lower than the 3.5% minimum down payment usually required by FHA loans, and you would have to pay a private mortgage insurance premium on the FHA loan, which adds significantly to your monthly payment.
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A’ohe pu’u ki’eki’e ke ho’a’o ‘ia e pi’i.
“No cliff is so tall it cannot be climbed.” – Hawaiian proverb
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FHA Loans.
FHA stands for Federal Housing Administration. If you meet the income, credit and other underwriting requirements, you can get an FHA loan with as little as 3.5% down. Furthermore, the FHA program allows some of that down payment to come in the form of a gift, so you don’t even have to use your own money: you can get help from your parents, close friends, a charity organization, your employer or labor union – even the in-laws!
Be advised, the lender will scrutinize where that money came from. You can’t use payday loans, cash advances, credit cards or other forms of “noncollateralized debt” for your down payment on an FHA loan.
The minimum credit score FHA lenders are allowed to approve with a 3.5% down payment is 580. That’s the regulatory minimum score (500 for down payments of 10% or more). But most lenders add some additional underwriting criteria of their own on top of the FHA criteria. So your chances of getting approved on great terms go way up if you can get your FICO score up in the 620 to 640 range.
The Federal Housing Administration recently increased the maximum loan amount under the program. For a single-family home on Oahu, you may be able to borrow up to $721,050. For Maui County, including Lanai and Molokai (except for the Kalaupapa Peninsula), the maximum is $678,500. On Kauai, it’s $713,000. It’s $387,550 on the Big Island, and $678,500 for Kalawao County on Molokai.
In order to be considered for an FHA mortgage, you need to meet the following underwriting requirements:
Have a debt-to-income ratio (DTI) of not more than 43% (there are some cases when lenders will stretch to 50%, but you’ll need all your other ducks in a row to make this happen!). Click here for our tips on how to improve your DTI ratio before you apply for a mortgage.
FHA guidelines allow sellers to contribute up to 6% of the sales price toward closing costs, which is a nice benefit for the FHA program from the buyer’s point of view. This reduces the need for having a lot of cash up front – especially in slower housing markets or special situations where you’re not competing with a lot of other bidders.
The Home Possible Program.
Home Possible is a relatively new program from Freddie Mac. It’s designed for lower and moderate-income buyers and you can buy a home with a down payment as low as 3 percent. That’s even lower than the FHA requirement!
Like the FHA mortgage, the Home Possible program allows for down payment help in the form of gifts. These gifts can even comprise the entire down payment – so you can buy a home under the Home Possible program without a single dollar coming out of your own pocket!
You’ll need to submit a mortgage gift letter – stipulating that the down payment is coming in the form of a gift, not a loan, and you have no obligation to repay.
Down payment funds must be seasoned. That is, they must have remained in your checking, savings, or IRA account for at least 60 days. That also means you can’t use “mattress money.” The lender has to be able to verify where the money has been for at least 60 days, so there needs to be a paper trail.
But here’s where the Home Possible has an important advantage over the FHA: once you have equity in the home worth 20% of the loan balance, you can drop the primary mortgage insurance. That can save thousands of dollars each year. With an FHA loan, you’re stuck with the PMI until you pay off the loan or refinance.
You can also include rental income you receive from tenants and boarders to help you qualify during the application process. And if you’re buying a single-family home, as opposed to a duplex or other multi-unit property, there’s no ongoing requirement to maintain a reserve.
Eligibility.
To qualify for a Home Possible mortgage, your income has to be below the median for your county. In Honolulu and anywhere on Oahu, that limit is $96,000, as of April 2019. In Maui County, the limit is $84,400. In Kauai County, the current limit is $87,000. On the Big Island, it’s $78,500.
If you’re buying a property in a designated low-income census tract, in rural or underserved areas, there is no income limit.
There’s no geographic limit on loan amounts – you just have to be able to qualify to make the payments. There’s no defined minimum credit score – it’s even theoretically possible to get a Home Possible mortgage with no credit score (with a 5% down payment minimum, rather than 3%). But in practice, you’re going to have a much better chance of approval if you can get your score to at least 620 to 640.
To be eligible for funding, you cannot currently own any other property. If you own one, you have to sell it first before getting funded for a Home Possible loan.
Note that we said “funding,” not “applying.” You can apply even if you own your current home. You just need to close the sale on your existing home before you can close on the new home using a Home Possible loan.
You can even close both loans on the same day! Give us a call if your buyer needs financing so we can get your new Home Possible loan funded – It’s much easier to arrange a double closing if both loans are with the same mortgage company – US!
To find out more about the Home Possible mortgage program, call us today at 808-891-0415.
HomeReady.
A HomeReady mortgage lets you purchase any home listed on the HomeReady website with a down payment as low as just 3%. These mortgages are great for Hawaii, where extended ohana living under the same roof is common: the HomeReady loan program allows you to qualify by combining the income of everybody in the household, even if they aren’t on the mortgage.
To qualify, you’ll need a minimum credit score of 620.
The HomeReady program also lets you use gift funds or charity funds toward your down payment. If you’re buying a 1-unit property, you can use gift funds for the entire down payment. So pass the hat!
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“Pupukahi i holmua.”
“Unite to move forward.” – Hawaiian catchphrase
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Further, there’s no up-front primary mortgage insurance premium due, like there is with an FHA loan. And when you get to 22% equity in the home (your LTV hits 78% or lower) PMI is cancelled—unlike an FHA loan, where you’re stuck with PMI until you either refinance or pay off the loan entirely.
We have a more detailed write-up on the exciting HomeReady program here.
So, if you’ve been waiting until you have 10%, 15% or 20% down to buy your dream home, you can stop waiting, and act now. There’s no need to wait forever. You can get a great home loan with 5%, 3.5%, 3% or even nothing out of pocket, in some cases – and start building equity today.
To get started and get pre-approved for a home loan, fill out our application online, or call Pacific Home Loans today at 808-891-0415.
Mahalo!