SANTA CRUZ (October 5, 2008) - Despite what the headlines would have you believe, the mortgage industry is arranging financing for homebuyers and refinancing homeowners. Most borrowers are choosing the ever-popular 30 year fixed rate mortgage and those interest rates have been hovering around 6 percent. Compare today’s rates with the historic lows of 2003, when rates were at their lowest in 40 some years, hovering around 5 percent.

So, what is there to complain about? The pendulum of underwriting guidelines has swung from the far left, where borrowers did not need cash, credit or income to qualify for a mortgage, to somewhere right of middle today. We now expect the borrower to have some cash for the down payment, a credit history that indicates the borrower is responsible and income that is documented by paystubs, W-2s or federal tax returns.

The days of widespread 100 percent financing are over and for good reason. Lenders want borrowers to have some cash into the transaction so they will not be so likely to walk away from their mortgage obligation when times get tough. The new rules for conventional loans require borrowers to have at least 10 percent down for conventional loans under $729,750 and at least 20 percent down for loan amounts above that. The borrower must have at least 5 percent of the sales price in their own funds, the balance may be a gift from a relative.

On the other hand, FHA allows borrowers to buy a home with as little as 3.5 percent down, which may be all gift from a relative. FHA does not require borrowers to be first time homebuyers and it does not require pest, roof, well or septic system inspections. It also allows non-occupying co-borrowers to help the occupant borrower qualify for the financing. This is a key feature that is no longer available in conventional financing. Although, refinancing homeowners need to have some equity, FHA will allow a homeowner to obtain a loan up to 96.5 percent of the current value of the home.

Clearly, underwriting guidelines no longer accept the popular ‘fog-a-mirror’ test but there is still hope for borrowers with a small amount of cash or less-than-perfect credit or inadequate income through the FHA loan program.

Twenty years ago income documentation was generally required. At that time World Savings was the one lender that would allow a borrower to obtain a loan without income documentation but they did require 20 percent down and were very fussy about the condition and type of property. As we all know, that privilege was abused by borrowers claiming to make more money than they really did. Income documentation is required today but lenders are still allowing borrowers to spend up to 60 percent or more of their monthly income on their house payment.

The mortgage industry is alive and well and loaning money to borrowers who demonstrate and can document their ability to make their payments on time every month. If you are wondering whether or not you can qualify for a mortgage in today’s climate, meet with a mortgage professional you can trust to get the straight story. If you don’t know one, ask your friends or work associates for a referral.

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.