SANTA CRUZ (December 26, 2009) - Change is the one thing you can always count on in this business. Most everyone knows that interest rates are in a constant state of flux but the guidelines under which loans are approved are also subject to constant change. Perhaps the biggest single change that we have seen has been the requirement that borrowers document their income and assets. It seems unbelievable now but prior to 2008 borrowers could obtain a good mortgage without documenting or disclosing their income.

In February of 2008 another major change occurred when the Bush Administration raised the maximum loan amount for FHA as well as Freddie Mac and Fannie Mae loans to $729,750. This limit is set each Fall for the following year and has remained the same for 2009 and will continue through 2010 as well. Rates for loan amounts above $729,750 can be a full one percent, or more, higher than for loan amounts under that limit.

Believe it or not, up until earlier this month, FHA, Freddie Mac and Fannie Mae had been granting loan approvals to borrowers who were spending 55-65 percent of their gross income on their house payments. Not anymore. Borrowers are now being restricted to spending no more than 45 percent of their income on their house payment or up to 50 percent with compensating factors like lots of cash in reserve or large down payments.

The Home Valuation Code of Conduct (HVCC) took effect May 1 and completely changed the way loan originators interact with appraisers. No longer can we communicate with appraisers. We have to order the appraisals through intermediary companies called Appraisal Management Companies (AMC) and we must receive the appraisals from the AMC. Effective in February, FHA loans also will require this same type of communication between lenders and appraisers.

Although FHA loans are still allowing borrowers to buy homes with just 3.5 percent as a down payment, HUD is considering increasing the minimum down payment to 5 percent. However, when compared with the 30 – 35 percent down payments required on some conventional loans, FHA will remain a very popular choice for homebuyers. By the way, FHA offers great 30 year fixed rates, has no income limits and does not require a homebuyer to be a first time buyer!

Effective February, it will become much more difficult for a condo to get FHA financing. As a direct FHA lender our company has had the authority to approve a single condominium unit in any project that had not been previously approved by HUD. Once these new guidelines kick in, HUD will be taking on the responsibility of approving an individual unit if the project has not already been approved, which may result in additional delays in the loan process. Right now there are only a handful of condominium projects in Santa Cruz County that are FHA approved.

To top it all off, the mortgage industry is undergoing an enormous change in the way it is to disclose a loan’s closing costs to borrowers. In an ineffective attempt to save borrowers money and to make loans more understandable, new stricter guidelines are coming into play on January 1. These changes are difficult to understand and some of the changes will surely adversely affect borrowers. When new rules such as these are implemented, it is clear that those of us working directly with borrowers had little or no input. The new disclosures in many ways give less information to borrowers and will likely prove to be counter productive.

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.