How Financing Details Affect Your Offer
The financing is basically the most important contingency in the contract, and everything either stands or falls because of the loan. It's important to work with a lender that is familiar with Hawaii Real Estate, because we have a lot of unique practices in Hawaii that mainland escrows may not. In Hawaii you can borrow up to $625,500 on a conforming loan, and anything above that is Jumbo.
You can buy a house with zero down, and every night on TV some guy will sell you a system to show you how for $99. Don't waste your money. You don't need any system to buy a house with zero down, you just need a good lender or mortgage broker.
Your down payment communicates something to your seller. It tells the seller how likely you are to be able to qualify for the loan. The money money you put down, the better your chances of getting a good A paper loan, and the better the likelyhood that you'll actually complete your purchase.
Since Hawaii Real Estate prices has increased so much over the last several decades, it's common to see people with $800k and $1million loans, so sellers can be nervous that it will be difficult to qualify for these huge loans. When you are buying real estate for a million dollars and you have no money down, it tells the seller that they should be cautious about getting into an escrow with you.
Let's say that you make an offer on a Hawaii Kai home for $900k, and you put only $1k as a deposit, and you want to borrow $899k on a loan. Hmmm… The seller thinks you have no money, so if you don't get that loan, you'll probably back out of the transaction. On the other hand, if you're putting $500k down, you probably have lots of alternatives to borrow money the chances of you cancelling the purchase due to the loan are minimal.
So consider carefully how much you will put down, and think about how the seller will perceive your down payment. It's right there in the contract, so you can't hide it.
This is simple math. Low rates means low payments, and Hawaii, prices are so high that even a 0.5% difference in rate could mean several hundred dollars a month. You want to state in your offer how high of an interest rate you are willing to accept, because if you don't lock your rate right away, it could jump up suddenly and make the payment unaffordable for you.
Make sure you have prequalified with a lender before you make your offer, so you know what rate you'll get and what kind of payment that will result in. Also you want to lock your rate early so you know it won't change.
People talk about prices going up and down, but the interest rate fluctuation is much more rapid than prices, and often the prices make less of an impact on the payment. As of 2009, rates are still at historical lows around 4.5%, so it's a great time to buy with cheap money!
Closing Costs and Financing Incentives
A buyer will usually have about 1% of the purchase price for closing costs, plus any points paid on the loan. This means on a purchase of a home in Kailua for $800k, you could have as much as $16k-$20k in closing costs. On the other hand, if you work it out with the lender, you can usually get almost no closing costs by having a higher interest rate.
Often you can get the seller to pay closing costs for you as the buyer, which is sort of like financing the costs into your loan. In a way it is, but in a way it's not. Let's say you offer the seller $800k on that same house in Kailua, and he counter offers at $835k. You decide you want to pay no more than $820k, and also that you want to lower your closing costs. So you counter offer at $820k, and ask the seller to pay $10k in closing costs.
Your original offer was $800k, and now the offer is effectively $810k. He comes back again at $830k with $10k in closing costs to you. In reality you're paying $830k, but he is giving you $10k toward your costs.
It gets a bit confusing, so it's important to watch these numbers carefully and make sure you know exactly what you are getting into.
It's less common these days because interest rates are low and the market is strong, but in the past seller financing was a useful tool for a seller wanting to get rid of a property. When rates were above 10%, buyers found it difficult to qualify for a loan, which meant that sellers were having trouble selling. So the sellers started offering to loan money to the buyers at a reduced rate to sell their properties.
In some cases sellers would offer to loan money at rates above bank rates, and the title to the property would not be conveyed until the buyer paid off the loan. Or in other cases, the title would be conveyed, but the seller would remain on as a mortgagee. Sometimes this is also called an installment sale.
In an installment sale the buyer agrees to make payments to the seller at an agreed upon interest rate for a certain period of time. At he end of this time the buyer would have to pay off the loan, sell the property, or get a new loan. It's not very common in Hawaii today, but it may come back in style if rates go up.
An all cash offer gives the seller some assurance that you won't back out of the property, even though you have plenty of other "outs" in the DROA. Since most escrows that end early end due to problems with the loan a cash offer is often much more preferable to a seller.
Making a cash offer in Hawaii means coming up with a LOT of money. The seller can see that you must be quite wealthy and so doesn't worry as much about your intent to buy. Also the seller may be willing to take a slightly lower price if he thinks your cash offer will guarantee him a quick easy sale.
Other Financing Details
Besides the loan amount, the interest rate and closing costs, you can also put other factors into your financing, such a second mortgage, a non-occupant coborrower, gift money from family, relocation money from your company, or even financing above the purchase price. All these details affect the perception of your seller and should be considered when making the actual offer.