How Are People Paying for Daytona Beach Homes?

Sales of Daytona Beach homes have been strong this year. People are buying homes and condos, but how are they paying for their properties. There’s an interesting new feature in our local MLS (multiple listing service) that shows how people paid for the property purchase.

In June, 52.4% of buyers paid cash. This doesn’t surprise me at all. I’m seeing about 80% of my buyers paying cash. Here’s the breakdown of how properties were paid for:

• Cash – 255 (52.4%)
• Conventional Mortgage – 136 (27.9%)
• VA/FHA 72 (14.8%)
• Other 24 (4.9%)

I went back to take a look at how financing has changes since the boom days. In June 2005 the numbers were completely different. 74.4% of homes and condos were purchased through conventional mortgages and 22.9% were cash buyers. In rough terms, 3 out of 4 people were using conventional financing in 2005 and 1 out of 4 are doing so today. Also interesting is that 1.3% of buyers in June 2005 used FHA or VA loans versus 14.8% last month.

Conclusions

More than half of buyers of Daytona Beach condos and homes are paying cash, about 1 out of 4 are using conventional financing and 15% are using VA or FHA loans. This tells me that if you want to finance at the good rates and you’re eligible that VA/FHA money is available (see Get Your FHA Loan Now) and people are getting loans. Make sure to check this avenue for the best options. If you have good credit and are willing to go through the new more stringent processes, mortgage money is available.

International Instability Keeping Mortgage Rates Down? – Nah

Most people who buy Daytona Beach and Ormond Beach homes and condos care only that mortgage rates are low. With prices being low, it’s a pretty good situation right now for buyers. However, there are those who like to speculate rather than report useful facts and information.

It appears that whatever is happening in the world is often used as an explanation for favored opinions. I been seeing a few references in the past few days that domestic mortgage rates are being held down by instability in international financial markets. I don’t believe this at all.

I’m not an economist, but that doesn’t stop me from understanding some basic things about money and interest rates. Mortgage rates are low because the demand for loan money is down. If there were better places, safe places, for banks to loan money, they would – at higher rates. Long-term bond rates that are correlated with mortgage rates are low, so mortgage rates stay low.

If the economy were in any state close to normal, we suspect rates would be much higher. The US government has been borrowing and printing money during this recession and we will eventually pay for that with inflation. We can’t know for sure when, but if history repeats, we can fully expect it to happen. When inflation kicks in, interest rates and mortgage rates will rise.

Mortgage Rates Next Year Don’t Matter Now

My point is that mortgage rates are low now. Prices are low now. If you are planning to buy, this year and next year will probably be the best opportunity for a long time. If you’re in the market, watch prices and watch mortgage rates. In the long-term, you won’t need to hit the absolute bottom of both mortgage rates and prices. Anywhere close should put you in a solid position for future appreciation.

FHA Waives 90 Day Rule for Investors Who Renovate and Sell

Properties purchased for renovation or repair by investors for resale were not eligible for FHA loans until 90 days after the purchase. As of February 1, that’s changing. The FHA is waiving the 90 day period for one year, starting February 1st, to allow investors to renovate or repair REO (real estate owned) and foreclosed properties and quickly resell them using FHA financing.

With FHA financing making up about 30% of all mortgage written today, we believe it’s important to keep you informed of changes as they occur. FHA loans are very attractive to both buyers because of lower down payment, credit requirements and closing costs, and to lenders because of government guarantees.

The FHA has been very active lately with rule changes and we’ve had a lot to report. Just a few days ago we reported on FHA Loan Changes that will make loans more expensive, especially for those with a FICO score under 580. Now, we see the FHA making more properties eligible for FHA financing.

There are also separate FHA Condo Financing Rules that restrict sales in many condo buildings, and new FHA Short Sale Polcies.

The bottom line to this change is that if you are an investor who is buying property for resale, the FHA has made it easier for you to sell the property by allowing buyers to use FHA financing without a waiting period. There are of course restrictions:

1. Only Arms length transactions are eligible. There can be no interest between buyers, sellers and others.
2. If the selling price is 20 percent or greater that the seller’s purchase price, documentation will be required by lenders  to justify the price. A new appraisal will probably be required to support the higher price.
3. An independent property inspection will also need to be provided by lenders to buyers before closing.

Will FHA Loan Changes Help Daytona Beach?

Will this change to FHA loan requirements for investors help Daytona Beach homes for sale? It certainly can’t hurt and may help move some of the REO and forclosed properties that have been damaged and need extensive repairs to sell. Investors can get a quicker turn-around, saving them money and making it more attractive to purchase and renovate or repair.

Borrowers to Pay More for FHA Loans

With rule changes that will be coming in the summer, an FHA loan could cost you 10% more to close. That $20,000 on a $200,000 loan.

3.5% Down Payments and seller concessions of up to 6% will soon be a thing of the past for many. Mortgage insurance premiums will also increase by 1/2 point.

The FHA is writing about 30% of all current mortgages – Meaning BIG exposure. Now, the agency is acting to limit the risk of future exposure. That’s probably a good thing for most Americans, but if you are planning to use an FHA for you Daytona Beach Homes purchase, it may cost you more if you wait until summer.

FHA Loan Change Prosposals

The FHA is making proposals to change mortgage insurance premiums, FICO (credit score) and down payment combinations and seller concessions.  The changes will be posted in the Federal Register next month and after a comment period would become effective early summer.

Here is a quick summary of the changes:

• Increase upfront Mortgage Insurance Premium (MIP) to 2.25% – up 0.5%
• Decrease seller concessions from a maximum of 6% to a maximum of 3%
• Change FICO score/down payment combinations to as low as a 3.5% for a FICO Score above 580 and up to 10% for a FICO Score below 580.

So, with a FICO score below 580, the amount of out-of-pocket money to close an FHA loan would increase by about $20,000 on a $200,000 mortgage ($1,000 MIP, $6,000 increase in seller’s concession, $13,000 increase in down payment). This would be added to the current total cost, an increase of 10%. A FICO score above 580 could still add about $7,000 or 3.5%.

The FHA is taking these actions to reduce troubled mortgages in the future. They will also be making changes to reduce fraud. See FHA Loan Sharks Creating More Real Estate Foreclosures for more information on that problem.

These actions will allow them to add to their reserves against bad loans. Whether it’s a good thing depends on your point of view. As a taxpayer, this should reduce the cost of running the agency to you. As a home buyer, it will increase your overall costs to borrow.

Mortgage Rates Jump to 5.37%

Yes, mortgage rates are up. Rates have jumped from 4.93% at the beginning of the month to 5.37% today. The question is will they go up further, or stop and reverse like they did over the summer when rates approached 5.6%?

Looking at the chart below from bankrate.com, we see mortgage rates varying over the course of the past 12 months. We can see several periods of ups and downs. Have the underlying conditions in the mortgage markets changed?

2009 Mortgage Rates Chart

The Mortgage Rate Factor

The easiest way to understand mortgage rates is to understand that if it cost lenders more, it will cost you more. Mortgage lenders compete with US Treasury Bonds which are fully guaranteed by the US government. Mortgage lenders will pay more to borrow than the government to compensate for risk.

Look at the chart below that combines mortgage rates and 30 year bond prices. It’s not exact, but the darker line is mortgage rates and the lighter line the 30 year bond rates. It appears to correlate very closely. As bond rates go up and down, so do mortgage rates.

2009 30 Year Bond Rates Against Mortgage Rates

Look across at the horizontal lines and you will see that the lines correlate. Ignore the vertical scale because I didn’t match up the scales. The point is that recent mortgage rates correlate with US Treasury 30 year bonds.

We see continued pressure on Mortgage rates because of continued pressure on 30 year Treasury Bonds. The deficit is at $12 billion and growing. We believe that results in inflation at some point. Inflation means that bond buyers will expect higher rates to compensate; bringing mortgage rates up with them.

What to Do Now

If you are in the market to purchase Daytona Beach or Ormond Beach real estate, and you will be financing your purchase, it will be important for you to track mortgage rates. To fully understand the impact of changes in mortgage rates refer to our article Basic Math for Home Buyers Who Finance.

Make it a point to track 30 year US Treasury bond rates too. You can track these at CNN, Bloomberg, or Yahoo Finance.

If you qualify for the current home buyers tax credit you should take advantage of it before it expires with contracts written after April 30th. We don’t know if the credit will be extended, so why not take advantage of as much as $8,000.

We’ve seen prices stabilize in the past quarter, but that’s no guarantee that they won’t fall again, but whether they fall or not, it is to your advantage to secure the lowest possible mortgage rate and get the tax credit. We can help you find properties that are priced right, but we still advise that you don’t buy in this market unless you are going to hold the property for 5-7 years.

We are available to discuss your options. Give us a call at 386-566-7503 with your questions.

Will a VA Mortgage Work for You?

VA mortgages are partially guaranteed by the Veterans Administration, require low down payments, require no mortgage insurance and have negotiable mortgage rates.

I’m a veteran having served with the Air Force as a radar technician. I was one of the few women in my career field. I remember cold winter nights repairing air traffic control radar in a remote part of Osan Air Base in Korea. When my husband left the Air Force in 1986, we used a VA loan for our first home.

A VA loan can be a great way to finance you primary residence, particularly if you don’t have the 20% down payment that most conventional mortgages require. Down payments can be as low as nothing, if the home appraises above the mortgage amount. If not, the bank will want down payment money to make up the difference.

Some banks are happy to work with you on a VA loan. The advantage to them is that the Veterans Administration partially guarantees the loan for them. However, there’s going to be more paperwork, but that’s the price you pay for dealing with both a bank and the government.

I would advise going to the VA website and downloading VA Form-1880 Request for Certificate of Eligibility so that you have the certificate before you approach a participating bank. The bank can request the certificate for you, but I would bet there would be a significant delay if they do it for you.

When you approach the bank, ask them if they are currently making VA loans. The VA does not guarantee the full amount of the loan, so the banks are going set their own standards for making the loan. You will need decent credit and sufficient income to qualify.

The major advantage of the VA loans is the low down payment and no mortgage premium insurance (PMI). You may also have reduced closing costs with this loan. The loan limit for Daytona Beach homes and condos is $417,000 for 2010. That should cover about 90% of available homes in the area.

Now for the caveat – if you are going to use a low or no down payment loan, plan to stay in that home for awhile. By awhile, I mean more than 5 years and probably closer to 7 years. You cannot get back your closing costs and pay sales costs in the short term. If you had to sell in two years, it would take money out of your pocket to make the sale.

If you are eligible for a VA loan, I believe you should explore the possibilities. You could get a better rate and save some money.

New Rules for FHA Condo Loans

The FHA has published some new rules for condo loans. These rules are more stringent and are designed to protect the agency from defaults and fraud.

The New Rules

1. 30% of the units must have already been sold
2. A big problem for Florida loans – no more than 15% of the units can be more than 30 days past due on the monthly condo association dues
3. A minimum of 50% of the condo units must be owner-occupied – this pretty much leaves condotels and condo conversion out
4. Residential square footage in the project must more than 75%. This means condos with lots of commercial space may not qualify
5. No single individual owner or investor can hold title to greater than 10% of the units in the project
6. The FHA will not insure more than 50% of the units in the project

You will have trouble with FHA condo loans if the developer is leasing units that haven’t sold. This falls under the 10% title holder rule from above. The developer is now considered to hold title as an investor since they are leasing the units.

Why Would You Want an FHA Loan for Condos

FHA loans are attractive for several reasons:

1. Low down payments – as low at 3.5%
2. Looser qualifying requirements – you don’t need perfect credit
3. Seller’s contributions – sellers can contribute to closing cost
4. Banks low them – they are guaranteed by the the US government

Daytona Beach Condos and the New Rules

I don’t think many Daytona Beach condos are going to qualify under the new rules. The problems with rule number 2 above, no more than 15% of the units can be more than 30 days past due on the monthly condo association dues is going to be a problem with many of the local condos. There are too many distressed units in those buildings. However, we can always check it out.

FHA loans are great for a home you plan to occupy and if you are interested in Daytona Beach homes and will be financing. you may want to check out FHA loans.