SANTA CRUZ (July 20, 2008) - The ‘mortgage meltdown’, as the press calls it, officially started last August but the beginnings of it were being felt by mid 2006. According to the Implode-O-Meter (ml-implode.com), 266 mortgage lenders have failed since this website began keeping track in May, 2006. As we know, even Santa Cruz has not been immune from the contractions in the mortgage business.

Conventional wisdom tells us that the cause of this mortgage meltdown was due to the fact that lenders offered a host of unbelievable options for the borrower. The key culprits were identified as100 percent financing, no income or employment documentation and low credit scores. Other options included low initial interest rates and the potential for mortgage balances to increase.

A casual observer may come to the conclusion that in an attempt to rescue itself the mortgage industry has turned itself upside down in an attempt to change all of the rules. To top it off, Congress is close to finalizing a bill that will further restrict lenders. The perception is that now mortgages are out of reach for most borrowers.

While it is true that mortgages are out of reach for those who cannot afford them, mortgages are readily available for those who can afford them. Furthermore, interest rates for some programs are not far off of historic lows. Affordability is all about income and debts and how they relate to each other. The mortgage industry’s most important ratio today is referred to as the debt-to-income ratio (DTI). It is calculated by dividing the borrowers’ monthly long term debts by the gross monthly income and is a measure of what percent of the borrowers’ income will be spent on monthly debt.

A DTI of 45 percent or less is ideal and means that a borrower will be spending no more than 45 percent of his income on all of his monthly debts. These debts include the principal, interest, taxes and insurance on the home plus car payments, education loans, credit card minimum payments, etc. Gross monthly income refers to a salaried employee. The income used in the DTI calculation for a self employed borrower is the net profit from the business as reported on Schedule C of his or her Federal income tax return.

Fortunately, FHA is offering mortgages with no down payment (with seller help) or as little as 3 percent down. Borrowers with less than stellar credit are also eligible. FHA really came into focus in February when the President signed the economic stimulus package which raised the maximum loan limit that FHA can offer to homes in Santa Cruz County to $729,750 (or, up to $1,403,400 for a four plex). These loans have been a very bright spot for our ailing mortgage industry.

Prospective homebuyers can do their own preliminary DTI calculation to determine how much money they can spend on a mortgage payment but will need professional help to accurately assess their borrowing capacity. Additionally, FHA allows the income from a family member to be used to help a borrower qualify. Call a mortgage professional who is approved to do FHA loans to find out what size loan you can qualify for. After all, with credit not an issue and with loans available that require little for a down payment, and with house prices at reduced prices, why not find out what you can qualify for?

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 of email him at Peter@SantaCruzHomeFinance.com.