SANTA CRUZ (December 13, 2007) - I remember when a down payment of 5 percent was not enough to buy a home and when second mortgages were only available from sellers anxious to help out the buyers of their homes because second mortgages were not available from institutional lenders. To this day, lenders refuse to loan more than 80 percent of a home’s value unless they are insured against a loss in the event the homeowner defaults on the mortgage obligation.

The mortgage insurance industry was created to protect lenders, not borrowers. If a homebuyer had only enough money for a 10 percent down payment, the lender would agree to provide a loan for 90 percent of the home’s value providing the homebuyer qualified for and paid for mortgage insurance. To qualify for mortgage insurance, homebuyers had to pass another level of stricter underwriting standards that the mortgage industry established. In addition, the homebuyer would be responsible for paying the additional premium which would add between one half and one percent to the interest rate.

When lenders began offering second mortgages, mortgage insurance quickly became a thing of the past. However, one of the byproducts of the current mortgage meltdown is the fall of the second mortgage. No longer is there a vibrant and viable market for second mortgages and, once again, we must look at mortgage insurance to help out our clients if they need to borrow more than 80 percent of their home’s value.

The other key area that needs refocus is the infamous debt-to-income (DTI) ratio. This ratio has always been a key factor to lenders when evaluating whether or not a prospective borrower could afford to make the mortgage payments. The DTI ratio is derived at by dividing the borrowers’ monthly long term debts (Principal, Interest, Taxes and Insurance along with car payments, child support, credit card minimum payments, etc.) by their monthly gross income. The net income would be used for self employed borrowers.

When I first entered the mortgage business in Santa Cruz in 1986, borrowers were not allowed to spend more than about 30 percent of their income on all of their combined long term debts. Over the years lenders have allowed that DTI ratio to creep up and up until it reached as high as 65 percent. In fact, there are still two or three lenders that are accepting these high ratios on conforming loans (under $417,000). I would not be surprised if that limit were to come down to 45 to 50 percent for all lenders.

Credit scores are also coming under increased scrutiny. A mid score (consumers get 3 scores) of 620 used to allow a borrower to qualify for the best rates. Lenders are now uncomfortable with borrower’s scores under 680 and we can expect that number to rise into the 700s soon.

One thing is for certain, lender guidelines will continue to tighten during this storm that the mortgage industry finds itself in today. Borrowers who have good credit, a down payment and adequate and documentable income should be able to find mortgages at reasonable rates.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 or email him at Peter@SantaCruzHomeFinance.com.