SANTA CRUZ (May 9, 2009) - Despite what you may read in the papers or see on TV, the mortgage industry is making loans and lots of them. With the exception of the prior few years, the guidelines are as lenient, if not more so, than they have ever been. To top it off, there seems to be an endless supply of money.

Homebuyers are able to buy a home with as little as 3.5 percent down and if you take into account the $8,000 tax credit for first time homebuyers, the down payment on a home priced at $400,000 is whittled down to a mere $6,000! Sure, the buyer’s closing costs can run $10,000 or more but in today’s buyer’s market, the sellers are often willing to foot that bill.

As for the underwriting guidelines, the only significant difference between the heady days of being able to offer loans to virtually anyone and today is that borrowers must now provide income and asset documentation. The amazing thing about the present guidelines is that borrowers are allowed to spend, in some cases, up to 65 percent of their gross income (this is the Debt-To-Income ratio or DTI) on their house payment. That house payment is higher than most borrowers would consider acceptable. In summary, the mortgage industry is allowing borrowers to spend more of their income on house payments than they want to.

When we talk about gross income we are referring to W-2 employees. To calculate the DTI, we use the borrower’s income before any deductions are taken out. However, when the borrower is self-employed, we will use the ‘net profit’ on the Schedule C of their Federal Tax Returns. To that figure we can add back any depreciation and most of any home office business expense that has been deducted.

Let’s not forget that the Obama Administration is giving us an incredible gift that could last up to 30 years: low rates. In its efforts to stimulate the economy the government realizes that encouraging homeownership for both homebuyers and homeowners is one of the key ingredients. With this goal in mind, the most obvious tool that has been manipulated is mortgage rates. The result is that mortgage rates are being held down artificially and temporarily. Rates for the ever-popular 30 year fixed rate have been below 5 percent for nearly five months. These historically low rates will not continue indefinitely; prospective buyers and refinancing homeowners should take action sooner rather than later.

The fly in the ointment is the fact that rates are higher and underwriting standards are much stricter when you get into loan amounts greater than $417,000. The result of this imbalance is that we are not seeing nearly as much mortgage activity for the higher priced homes as we are for homes priced under about $600,000.

The press loves to stir it up, I guess because it makes for more interesting reading for readers. The other interesting aspect specifically about newspapers, at least when it comes to covering the mortgage industry, is that the articles are usually (the Santa Cruz Sentinel excepted) written by journalists, not by mortgage professionals. I was pretty excited when the Los Angeles Times contracted me to write my weekly column in the paper. No sooner than my first column was published when they cancelled it stating that they did not want columns written by anyone in the field?

This column is written every Saturday 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.