SANTA CRUZ (October 10, 2009) - Despite the mortgage meltdown and the subsequent tightening of mortgage guidelines, the mortgage industry is still allowing borrowers to spend more money on their house payment than borrowers are comfortable spending. In fact, borrowers can spend 45-55 percent or more of their gross monthly income on their monthly debts, which includes the house payment. This is true even when the borrower puts up just 3.5 percent of the sales price for the down payment.

Despite the low down payment requirements and despite the fact that the mortgage industry is allowing borrowers to spend half of their income on their monthly debts, buying a home is clearly not for everyone. Buying a home is a huge commitment of time, energy and resources and should not be undertaken just because the mortgage industry will approve a loan or because it is the ‘American Dream” or because there is an $8,000 tax credit waiting to be claimed.

Homebuyers should not be buying a home unless they are able to realistically plan on keeping it for a minimum of five years and, ideally, 7 – 10 years. We used to be able to count on home values going up 5 percent or more per year; not anymore. While we are not expecting home values to fall anymore, home values in Santa Cruz County may not be doing much appreciation over the next few years and, in some cases, there are bound to be some home values that may still decline. Because there are significant costs incurred when buying and selling a home, a home that has experienced little or no appreciation will be hard to sell in less than five years without bringing money to the table in order to sell it.

Another area that must be given consideration is income level and job stability. How secure is the borrower(s)’ employment? Will there be a cut in salary or mandated furloughs like some city, county and state employees have experienced. Does the household budget have room to be flexible? Are there adequate reserves to carry a homeowner through a tough period or is there enough cash on hand to cover unexpected home, car or health needs?

Even though most agree that this is an excellent time to be buying a home (low mortgage rates and low home prices), renting a home is generally cheaper than buying for the short term. The same home that could sell for $600,000 and requires monthly payments of $4,000 may be available to rent for less than half of that. However, when looking at the long term (5 – 10 years) and if one considers appreciation occurring at the rate of even just 3 - 4 percent per year, buying a home still can make good economic sense.

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.