It’s no secret that it has become more difficult over the last year to obtain conventional financing for the purchase of a property on the Big Island of Hawaii.  Banks and lenders are being cautious as they sort out new regulations and changes in how appraisals for certain loans are handled.  Lending options for Lava Zone 1 and 2 properties have become more restricted.  Loans for vacant land are rarely seen these days.

So, what’s a buyer to do?

First, of course, is to determine whether your personal financial situation is secure and you are ready to take on the responsibility of new debt.  If you are, there are alternatives to conventional financing that you and your agent can explore:

Purchase Money Mortgage/Agreement of Sale:
In some markets, seller financing is almost unheard of, but it’s a little different here on Hawaii Island.  There is a long tradition of transactions using Agreements of Sale and Purchase Money Mortgages.  In fact, there have been 118 listings sold using seller financing so far this year.  Down payment and interest rate terms are negotiable, but buyers should expect that most sellers will do a thorough credit check, so your credit rating is still very important.

Recognizing the differences between Agreements of Sale and PMMs is also important.  In an Agreement of Sale, the seller retains legal title until the buyer has fulfilled the obligations of the contract, but, otherwise, the buyer has full ownership rights and responsibilities. With a Purchase Money Mortgage, title is legally transferred to the buyer at the close of escrow.  A PMM is similar to a bank mortgage.  If you elect to use an Agreement of Sale or Purchase Money Mortgage, be sure you seek appropriate legal advice and fully understand the terms of your contract.

USDA Rural Housing Loans:
This is a great program for Hawaii Island, since most areas of the Big Island (with the exception of Hilo) are eligible.  Families with moderate but dependable income will usually fall within the income limits, and there is no minimum credit score required.  This program will allow the buyer to receive assistance with closing costs from the seller and, in some cases, the loan can be for up to 102% of the appraised value with zero down payment.  Homes that qualify for this program must be 100% habitable at the time of closing.

For more information view the “Guaranteed Rural Housing Loans” publication by USDA Rural Development (PDF).

FHA 203(K) Rehab Loans:
The 203(K) Rehab loan is a seldom-used program in Hawaii, but the Honolulu HUD office emphasizes that the loan is available for Big Island buyers.  This loan program is designed to allow a buyer to purchase an existing home that is in need of renovation or modernization, but to do the repairs after the close of escrow.  Funds approved for the renovation are held in escrow and disbursed in increments as the work is completed.  There are additional paperwork requirements and additional fees for a 203(K) loan, but, in a market where sellers may be unable to do necessary repairs before closing and buyers don’t have substantial cash reserves for repairs, this loan may be worth considering.

For more information read Rehab a Home W/HUD’s 203(k) on the US Department of Housing and Urban Development website.

At Clark Realty, we recognize the challenges of this unique market, and we will do our best to work with buyers and sellers to make the most of the opportunities presented by these challenges.  If we can answer more questions for you about these or other financing options, please feel free to contact us!

That being said, this is definitely not for everyone and requires solid financial guidance from a qualified estate or financial planner.

Depending on the length of the mortgage, the interest rate could be as low as 2.63% and could be increased from there depending on the needs of the parent and child. Tax advantaged inheritance goals can also be accomplished by forgiving portions of this debt each year, being careful not to exceed gift tax maximums. Depending on the number of people involved this could amount to as much as $52,000 per year where both parents are gifting to their child and spouse.

It goes without saying that the parents must look out for their own financial best interests first and must have trust and confidence in their heirs’ stability and ability to meet their financial obligations. Fortunately, a properly secured mortgage can offer significant protections to the parent’s assets; however, parents still have more of a need to be cautious and prudent than the bank when considering this alternative.

There are many other important concepts and considerations that must be reviewed with an expert financial or estate planner before anyone should consider this option. However, the rewards can be significant for both parent and child and are well worth considering, especially during our current buyer’s market where pricing is becoming so attractive.

P.S.  I forgot to mention; the interest payments the kids are paying to Mom and Dad can also be tax deductible!