- Hawaii’s escrow process is similar to other states where an escrow agent, closing agent, or representative from a title company is used to complete the transaction.
- The buyer’s funds are held by a neutral third party, as is the purchase contract until an escrow agent verifies that both parties have performed their roles in the transaction and prepares the new title.
- Documents are signed and payments made, and within a few days, the escrow company then disburses all funds and the listing agent delivers the keys to the property to the buyer.
- Hawaii has unique features to its home buying process, including two types of property not common elsewhere in the United States (but somewhat common elsewhere in the world), leasehold and fee simple properties. Buyers in Hawaii are strongly urged to speak to a real estate professional to understand these unique property types before buying.
Step by Step
Part 1: Disclosures, inspections, and credits
These are the initial tasks once a buyer is in contract, and are most often done in parallel to Part 2: The mortgage process:
- An offer is accepted by the seller and a contract is signed and accepted. The escrow process begins (a.k.a. escrow is ‘open.’)
- A deposit, called earnest money, is deposited with the seller’s real estate brokerage, an escrow agent, or an attorney depending on the contract (never to the seller directly). Escrow companies are often part of a title company but work as separate divisions.
- Within a certain number of days from acceptance (indicated in the contract), the seller must provide a written disclosure statement. These disclosures vary based on property type but often include things like known flaws with the property, prior improvements or repairs, and potential environmental hazards.
Buyers must sign an acknowledgment of these disclosures by a certain number of days after receipt. They also have a certain number of days to back out of the deal as a result of something objectionable they find in these disclosures (check your contract for specific timelines). Also, if any further defects or inaccuracies in the original report are found by the seller before closing, they must report these in an amended disclosure statement.
- The buyer then has a certain number of days to conduct inspections on the home and request any repairs or closing cost credits as a result of what’s found during the inspection (which can be referred to as the inspection contingency date).
In Hawaii, common inspections include an initial inspection by a licensed home inspector and additionally a termite inspection (note: a termite inspection usually has its own inspection contingency date in the contract). A mold inspection may also be performed.
- If the buyer finds anything objectionable during inspections, they can report these defects and ask the seller to remedy the defects they found (or provide closing cost credits to cover the repairs). Sellers have three options: a) agree to all of the buyers’ requests, b) offer a modified solution back to the buyer, or c) decline to make any amends.
In response, the buyer can continue to negotiate, accept the seller’s position, or walk away. All of this, of course, is done in writing and within the dates and times indicated in the contract. Failure to come to an agreement simply means the transaction is canceled and the buyer can recover their earnest money deposit.
- Staking and a property survey may also be performed during this period. Additionally, a well test septic certification is required by most lenders if the property uses well water and a septic system.
- If the home was built before 1978, the buyer may also elect to do a lead paint inspection (and they may be required to do so by their lender anyway). Similarly, an asbestos inspection may be ordered for older properties.
- The buyer may also negotiate for a home warranty that covers major appliances from failure for a time period after the sale, typically a year.
Part 2: The mortgage process
For those borrowing to purchase their home, the mortgage process is usually the most stressful and opaque part of the transaction. It’s best to start as early as possible and be ready to produce lots of documentation. The following is the general process in Hawaii:
- A buyer submits a loan application to their lender, either directly or through a mortgage broker. See a sample Uniform Residential Loan Application used in Hawaii.
In most Hawaii home buying contracts, buyers must apply for a loan by a certain date, and if they haven’t already, submit a pre-qualification or pre-approval (of a borrower) letter stating that they’re generally creditworthy. Then, the buyer must deliver a loan commitment letter to the seller by a specific date, and within a certain number of days after that, remove the financing contingency by demonstrating they’ve met all the conditions of their loan and are ready to close.
- The lender sends a “Good Faith Estimate,” or GFE, to the buyer that is a breakdown of estimated closing costs within 72 hours of the filing of the loan application. The final costs are likely to deviate from this estimate. See a sample GFE at hud.gov.
- The lender typically submits a request for title commitment to a title company. The title company then conducts a title search (or preliminary title report) and examines the quality of the title and any findings from the property survey that is provided.
If all is well, a title commitment will be prepared that certifies that the title is free and clear and ready for sale. Title insurance may also be arranged in this step. In Hawaii, buyers have a certain number of business days within which to object to anything that’s found in the title search or preliminary title report.
- The buyer sends a series of personal financial disclosures to the lender. These vary by situation, but the most commonly requested documents are:
- Several months of statements for each bank account a borrower holds (including any investment accounts)
- Several months of statements for any outstanding loans, lines of credit, or other liabilities. This can also include documentation of rent payments.
- Up to two years of tax returns, released to the lender via an authorization submitted by the buyer using IRS form 4506-T.
- Recent pay stubs and contact information for each borrower’s employer. The number of pay stubs varies by situation.
- Any other disclosures that are material to a borrower’s financial situation. This includes but is not limited to marriage licenses, divorce settlements, child support, liens, bankruptcies, or judgments. If there’s something that affects how much money you have on hand that isn’t shown by simply looking at your salary, be prepared to document it.
- Explanation of any credit inquiries
- Substantiation of any large deposits or cash gifts that aren’t regular income. In some cases, a large cash gift may look similar to a personal loan by a friend or family member, and lenders will require gift letters from those that gave you the cash gift, stating that the gift was not a loan. They may also ask for itemized deposit slips.
The exact amount that triggers this requirement varies by the situation (for instance, a $1,000 cash gift may be material to a single borrower that makes $35,000/yr but may not be material to a borrower that makes $350,000/yr), so it’s good practice to ask your lender if you suspect you might have a material cash gift or large deposit – so you aren’t surprised by this at the last minute.
- Repeated and updated documentation of any of the above. Keep in mind: to a lender, anything can happen to a borrower’s personal financial situation and credit during the escrow process. Thus, you may be asked more than once for the same type of document so that your lender has the most recent pay stubs, rent receipts, bank statements, or other disclosures that may change over time. Any material changes in these documents -or any element of your personal financial situation- may require the lender to reassess your eligibility for the loan for which you’ve applied.
- An appraisal is ordered by the lender or mortgage broker via a central directory of appraisers (often called an Appraisal Management Company or AMC). Choosing a specific appraiser is not possible, but an agent or a mortgage broker can reject an appraiser and ask for a new one. If the appraisal comes in lower than the purchase price, a lender can decline to approve the borrower unless a change is made to the purchase price or the size of the downpayment. Many contracts in Hawaii don’t include an appraisal contingency by default, but many deals include an additional condition that the property appraises at or above the purchase price.
- Homeowners’ insurance is purchased (or substantiated, if the property being purchased includes homeowners’ insurance as part of association fees or similar arrangements), and proof of homeowners’ insurance is submitted to the lender.
- Hazard insurance may be required by the lender to protect the asset from fire and storms.
Tip: As this process can be long, arduous, seemingly arbitrary, and is often critical to your homebuying transaction, try to prepare these documents (or at least figure out how to prepare them) in advance. Also, do not make any changes to your employment or credit until your transaction is complete (not just until you get a loan commitment letter). This means not switching employers even if it results in a higher income, as counterintuitive as that may sound. It also means not leasing or financing a car, opening a new credit card account, or anything else that can affect your credit report.
Part 3: The closing itself
The closing process itself can span a couple of days or even a week, and in contrast to other parts of the country, the transaction is generally not consummated with all parties sitting at the same table. In Hawaii, an escrow state, closing consists of the following steps:
- A buyer’s lender sends final loan documents to the escrow agent and the final closing date is scheduled.
- A final walkthrough will often be performed the day of or before closing to verify the property is in the same condition it was when the process began, provided it’s agreed upon.
- The closing itself convenes at the office of an escrow agent, closing agent, or title company where a buyer signs all closing documents, including the HUD-1 (see a sample HUD-1 here), and the final loan documents. Generally, the seller signs their documents at a different time (or even day).
- The buyer pays the remaining funds for their downpayment and closing costs to either the escrow agent, closing agent or representative of the title company (via wire transfer cashier’s check). This may also be done a few days in advance to speed along the closing process.
- The deed gets recorded with the appropriate municipality and the escrow agent disburses funds to the appropriate parties.
- The deal is now closed – the buyer receives the keys and, unless indicated differently in the contract, officially takes possession of the property.
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