SANTA CRUZ (December 23, 2007) - Santa Cruz is unique. Despite the fact that home values across the country have fallen, our home prices have held relatively steady throughout the past two years. The Santa Cruz Association of Realtors reported that the median price for a home for the first 11 months of this year stands at $759,000. Compare that to 2005 when Santa Cruz County’s median home price hit a record high of $754,000! However, nationwide, in an attempt to keep ahead of falling values, lenders across the country are now placing restrictions on loan-to-value (LTV) ratios. Since the pendulum has swung towards decreasing values, lenders are scrutinizing the value of homes and their corresponding appraisals.

Most importantly, lenders have identified specific neighborhoods that they have determined have ‘declining values’. In our area, Watsonville and Salinas have been designated as having declining values. In those areas, lenders are automatically cutting their LTV guidelines by 5 percent. That means that if a lender is willing to loan 95 percent of a home’s value under normal conditions, they will loan a maximum of 90 percent in a market with declining values.

In addition, lenders have imposed stricter guidelines on appraisals in these areas. They want two extra comparable sales that have sold within the past 90 days plus two current listings included in the appraisal. When you compare that to the previously required 3 comparable sales within 6 months you can get a sense for the difficulty in meeting today’s new guidelines. Furthermore, review appraisals are being called for. So, in addition, to the original appraisal that the mortgage consultant orders, the lender will conduct another appraisal by one of their approved appraisers. Sometimes the review is simply done at the desk and sometimes it requires the review appraiser to visit the property. Large loan amounts (over $650,000) and LTV ratios over 80 percent will automatically trigger the need for a review appraisal.

The other big news is that lenders are setting rates and fees based on credit scores. Lenders have always had numerous pricing add-ons to cover such variables as loan size, loan-to-value ratio, occupancy status, type of documentation required, etc. Credit scores have now become an integral part of loan pricing. In the past, credit scores over 620 generally allowed the borrower to qualify for the best rates. Now, 720 is more the minimum standard. Borrowers with credit scores below that will now be paying up to one half of one percent more in rate and that can add as much as $100 - $150 per month to a mortgage payment.

This special attention paid to credit scores is not unique to mortgages. Consumers with low credit scores are also paying higher interest rates for car loans, credit cards, etc. Clearly it pays to take good care of your credit. Since credit scores are constantly changing, it is smart to review your credit report at least annually. While free credit reports are available, I recommend that you have a mortgage professional obtain and review your credit report with you once per year. You will find out what your scores are (the free credit reports do not provide scores!) and you will have someone interpret what the report’s findings mean and some of the ways you may be able to  improve them.

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.