BY LISA SCONTRAS
You are excited about buying that home but you realize that you don’t quite have the required 20 percent down payment. Fear not. First Hawaiian Bank can provide you with solutions to make your home buying dream a reality.
Joyce W. Borthwick, senior vice president of real estate lending at First Hawaiian Bank, says financing is available with less than a customary 20 percent down payment. In fact, at First Hawaiian Bank, borrowers can come in with as little as 3 percent of their purchase price for a down payment.
“Yes financing is available even if a borrower has not yet saved enough to make a 20 percent down payment,” she says. “Examples include conventional financing with private mortgage insurance.”
What is mortgage insurance, and do you need it?
Typically, when a borrower puts down 20 percent cash and the lender provides the other 80 percent, risk is shared between the borrower and the lender, as both are invested. For borrowers with less than the 20 percent down required on a conventional loan, there is more risk to the lender.
In other words, if a borrower has invested a larger amount of his hard-earned cash, he/she is going to be less likely to default on the loan. For the lender, less down equals more risk. And lenders offset the additional risk with mortgage insurance. The monthly installments of mortgage insurance premiums – typically paid for by the borrower – serve to mitigate some of the risks if the borrower defaults.
“Private mortgage insurance is typically required on a conventional mortgage loan, which provides protection to the lender if the borrower stops making payments as promised and the lender incurs a loss in a foreclosure action,” says Borthwick. “Private mortgage insurance provides a vehicle – an opportunity – for the borrower to make a purchase now rather than later. It is a very good time to buy now, since interest rates are at or near record lows and sales prices are trending upward.”
But, Borthwick adds, there are other types of financing, FHA, VA and USDA loans, which also have an insurance component. But the borrower – and the property -may have to meet certain qualifications.
For example, VA loans offer up to 100 percent financing to eligible members of the armed services. For non-veterans, the Federal Housing Administration’s FHA loans provide 96.5 percent financing to owner occupants. Both these government programs are aimed at helping first-time homebuyers.
Additionally, the U.S. Department of Agriculture has funds designated for property in certain areas of Hawaii, where buyers can qualify for 100 percent financing.
“First time home buyers might want to seek home-ownership education from a HUD- (Housing and Urban Development) approved counseling agency, such as the Hawaii Homeownership Center,” says Borthwick. “Their counselors will walk the homebuyer through the entire home-buying process, including pros and cons of various loan options. HHOC also has a down payment assistance program.”
Lastly, there are piggyback loans, where the first mortgage is at a loan-to-value ratio of 80 percent, and the borrower applies for a second mortgage simultaneously for an additional 10 or 15 percent.
“This allows the borrower to reduce the amount of the required down payment without private mortgage insurance,” she says. “However, due to the risk involved with low down-payment loans, lenders typically prefer not to lend up to 90 percent or 95 percent without private mortgage insurance.”
Coming up short with down payment funds is not an uncommon obstacle to buying a home, but should not be a show-stopper. For those who are having difficulty coming up with the required 20 percent down payment, mortgage insurance may be the ticket to homeownership.