Columbia SC mortgage lenders have “seen it all.” With banks paying low interest rates and the stock market in the midst of a mini-crash, it's tempting to just keep your cash at home. However, if you’re planning to buy a home and need that cash for a down payment you’d better rethink that investment “strategy.” You won't be able to use it unless it’s accounted for.
Columbia SC Mortgage Market: Cash Isn't King
In a recent survey by American Express, 57% of consumers say they have cash in a bank account. Surprisingly though, 53% admitted to keeping additional cash stashed in their home.
If you’re preparing to go to a loan closing, cash isn't king. You’ll need a cashier’s check from a bank or other financial institution. One mortgage lender says, “Cash on hand is unacceptable… No title company is going to accept (actual) cash… at the closing.” The lender will view the cash with a big red flag, and will assume it was gained illegally — despite your claims to the contrary.
Nowadays, real estate agents and mortgage professionals are keenly aware of the possibility of money laundering. Even bringing a modest amount of cash to a closing could prompt the filing of a Suspicious Activity Report with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department.
In a 10-year study from 1996-2006, FinCEN reported that 20% of residential real estate sales transactions earmarked as suspicious showed evidence consistent with money laundering.
If the financial institution can’t document a legitimate source of the cash, even a mortgage pre-approval letter from a Columbia SC mortgage lender is virtually useless. A pre-approval letter states there is sufficient income, assets and a qualifying credit score for financing. The pre-approval is still subject to final verification by a credit underwriter at the mortgage lending company.
As a result of the Secure and Fair Enforcement for Mortgage Licensing Act of SAFE Act of 2008, and increased safeguards on “stated income” loans in the Dodd-Frank law of 2010, lenders must account for every dollar in a mortgage lending transaction.
In addition, the Patriot Act in 2001 tacked on more restrictions to discourage terrorist groups from money laundering in mortgage transactions.
Cash savings must be on deposit in a financial institution account to be counted as part of the overall asset evaluation. Plus, it has to be in the account at least 60 days for mortgage lenders to term the cash “sourced and seasoned.” A cash gift from a relative must also be documented to make sure that money isn’t considered a loan which may hurt the borrower’s debt to income ratio.
Columbia SC mortgage lenders advise if you’re planning to buy a home with a mortgage loan, deposit the cash into a bank account as soon as possible. Don’t be surprised when your bank files a Currency Transaction Report (CTR) with the IRS. Even smaller cash deposits over short periods to “fly under the radar” of the legal reporting limits of deposits over $10,000 will be reported.
Despite the warnings, mortgage lending experts say around 5% of loans each year involve cash money issues. Most of them can be ironed out — as long as the borrower informs the lender early in the process.
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If you have a Columbia SC mortgage and didn't make at least a 20% down payment, you probably have private mortgage insurance (PMI.) PMI protects the lender if the borrower is unable to make the mortgage payments. Because PMI premiums are paid monthly in the mortgage payments, they can add up. So, how can you avoid PMI or drop it later?
Avoid Columbia SC Mortgage Insurance
The first way is easier said than done. To avoid PMI make sure you borrow 80% or less of the home's value. In other words, put 20% down when you purchase. Some people – even if they have the money – are hesitant to wipe out their savings or spend the money they were planning to use to make improvements to their new purchase.
Sometimes, your mortgage lender will pay the PMI for you. Lender-paid PMI involves the Columbia SC mortgage lender paying for the insurance in exchange for a slightly higher interest rate. The lender pays the PMI company directly, while the borrower "repays" the premium in higher monthly principal and interest payments. Many homeowners like that because they can deduct all the interest paid, while the PMI premiums are not deductible. One word of caution, however: while you can request the mortgage insurance requirement be dropped in time, the higher interest rate will remain until you sell the home, pay off the mortgage or refinance.
Lenders are required by the Homeowners Protection Act to remove PMI once the mortgage loan balance has dropped to 80% or less of the home's original sales price. That could take a while, but there's a way to remove it more quickly. By watching the marketplace you can get an idea of your home's value. As your home appreciates, the remaining loan amount you owe is a lower percentage of your home's new value. This ratio – called the loan-to-value ratio, or LTV – will over time be at or less than 80%. When that happens, request that your lender drop the PMI requirement.
For documentation, your lender may require an updated appraisal of your home and will require you to pay for it. But remember, only approach your lender when you're confident your home's value qualifies for the 80% or lower LTV. Consult a real estate agent or use the Internet to monitor comparable homes in your neighborhood. An appraisal will probably cost $300-$500, so make sure you qualify to remove the PMI before you contact your Columbia SC mortgage lender. Lastly, some lenders require the borrower to keep the PMI coverage for a minimum of two years. Check with your lender to find out what they require.
Sometimes, simply asking your lender to do away with PMI won't work. An FHA loan, for example, requires PMI for the entire loan term. In that case, you'll need to refinance – either with a non-PMI required FHA loan or a conventional loan. However, be smart. Refinancing just to get rid of the PMI insurance premium probably isn't a good idea since closing costs aren't cheap. It may cost more out of pocket than it's worth. Consider refinancing only if it makes good financial sense.
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Columbia SC mortgage experts say 2016 may bring greater borrowing opportunities for homebuyers. Although you still have to qualify for the amount you want to borrow, more lenders are reporting a loosening of credit standards. Fannie Mae says loan underwriting is expected to ease in the near future. Let's examine why this may be the case and what the effect may be.
Columbia SC Mortgage Industry to Aid Housing
Relaxed credit requirements will likely help the housing market. Tight credit standards and a short supply of affordable homes for sale have been cited as reasons for the housing market's slow recovery. In a recent survey of Fannie Mae lenders, 16% said they expect a relaxation of credit standards in 2016. Lenders expecting a tightening of standards dropped to 2%. The survey was conducted by Fannie Mae and represented a cross-section of nearly 200 lending institutions.
While credit may improve, affordability for first-time home buyers will remain a challenge. With the number of starter homes on the market, home price appreciation is still higher than growth in household income. However, the easing of credit standards should provide some assistance to offset affordability.
As the prospect of rising interest rates looms in 2016, many lenders expect more competition. This may persuade them to ease some of the lending safeguards added after the last housing crash. Fannie Mae, Freddie Mac and the FHA have all worked to clarify lender liabilities for bad loans. They have been pushing hard for lenders to ease their credit practices to help the housing market recover.
In addition, Fannie Mae recently announced a new credit scoring program. Dubbed "trended data," the scoring model shows a broader review of the credit history of borrowers. That should improve the credit scores of some home purchasers. According to a recent study by TransUnion, trended data would increase the percentage of borrowers in the "super prime risk" tier from 12% to 21%. Those borrowers would get better access to new mortgage loans at the best rates.
Despite the potential relaxation in credit standards, a recent survey by the National Association of Realtors revealed roughly 66% of consumers perceive mortgages as "somewhat difficult" or "very difficult" to obtain in today's market.
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As predicted by some in the Columbia SC mortgage industry, sales of existing homes fell sharply in November. Insiders say the new consumer disclosure rule was to blame. The rule resulted in delays in many mortgage loan closings.
Columbia SC Mortgage Fears Realized
The sale of existing homes dropped 10.5% during November from the previous month, according to the National Association of Realtors. With a seasonally adjusted annual rate of slightly more than 4.75 million homes sold, it was the slowest month for existing home sales in more than eighteen months. The decline follows a 3.4% decrease in October, as well.
The chief economist for the National Association of Realtors, Lawrence Yun, said the decline in demand was due, in part, to the Consumer Financial Protection Bureau's recent new disclosure rules. The requirements, known as "Know Before You Owe" or TRID (Truth in Lending Act and Real Estate Settlement Procedures Act integrated disclosures,) went into effect in October. Confirming the fears of many in the Columbia SC mortgage industry, the disclosure forms have increased the time needed to close a loan. The delays pushed closings that should have taken place in November into December, sometimes January.
Lower home inventory and higher asking prices were also responsible for the drop in home demand. The combined impact meant that existing home sales dropped nearly 4% in November compared to November of 2014. That decline was the first year-to-year decrease since September of 2014.
As written in a previous article on this topic, mortgage lenders feared the new changes would create technological hurdles requiring additional software programs and thousands of man-hours.
The disclosure form given to the consumer after the loan application begins — known as the Loan Estimate — covers the rules as to what can and cannot be done by the lender. It includes cost estimates approved by the borrower in writing before the application process can continue. The Closing Disclosure must be given to the borrower within three business days of closing. It shows all the costs paid by the consumer. If the borrower wants to make any changes during the three-day window, the three days start over. As expected, this has caused delays and the "domino effect" creates additional delays in loan closings.
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The Columbia SC home buying market may feel the effects of the Federal Reserve’s recent decision to raise interest rates… or not. The Fed increased the rate on federal funds for banks by .25%, the first such increase in over seven years. What does that mean for people contemplating purchasing a home?
Columbia SC Home Buying: What's Next?
As part of an overall strategy to allow the market to recover from the 2008 housing crash, the Federal Reserve purposely kept interest rates low.
For months new home buyers have anticipated a rate increase. That’s given many an incentive to buy or refinance existing mortgages before rates went up. However, a slight interest rate increase isn’t likely to deter buyers from continuing to shop for homes. If anything, it may continue to make them aware that interest rates could be on the rise and now is the time to buy.
The increase in the Federal Reserve rate won’t affect you all that much. There’s little correlation between the Fed’s interest rate and mortgage interest rates. Economists argue that rates on new mortgages have fluctuated throughout the entire year without any change in the Federal Reserve’s policy until recently. They cite, for example, a movement of 70 basis points (.70%) in the 30-year fixed rate mortgage loan category during 2015.
Higher rates don’t mean mortgage lending will tighten up. Because the Fed's rate hike was so small, it’s not likely to prevent homebuyers from being able to purchase. There are mortgage products available for most every financial situation — from low down payment requirements to still-attractive fixed rate 30-year conventional loans.
Higher rates may motivate you to act. Some economists expect interest rates to rise in 2016 by as much as 1%. While the increases will probably be small, they may serve as the “nudge” that some Columbia SC home buyers need to get off the fence and get serious about buying.
Higher interest rates may keep home values in line with wage increases. Home values increased dramatically in some markets during 2015. This appreciation rose higher and faster than wage increases, making it harder for many Americans to afford to buy. The rise in interest rates typically slows the rate of home appreciation. This will allow wages the opportunity to “catch up” with real estate appreciation, making homes more affordable.
If you have an adjustable-rate mortgage, you probably shouldn’t worry. You probably don’t have an ARM. Experts say 85-90% of mortgage originations in the past two years were for 30-year fixed rate loans. Homeowners that may have had an ARM likely refinanced during 2015 expecting a possible rate increase. If you have an ARM don’t worry. Most ARMs have a locked interest rate between 5-7 years. The rate will remain unaffected during that period. Even if you’ve passed that timeframe, chances are the rate increases in 2016 will be small. If you’re still worried about the future, a fixed-rate refinancing is always an option.
Continue to shop around for the best deal. Just as the Columbia SC home buying process involves looking for the home that best suits their needs, you should do the same when loan shopping. Find the loan program that fits you and your financial situation. Shop around. Ask questions. Compare rates and lenders.
Get more information on Columbia SC home buying by checking out our other articles in the Columbia SC Home Buying Tips section just beneath Columbia SC Real Estate Categories to your right.