SANTA CRUZ (November 16, 2008) - When I bought my first home in Santa Cruz in 1984 I was told by the bank that I did not make enough money to qualify for the mortgage I had requested. My father had a good job (he was a professor at U.C. Berkeley) and my loan officer suggested that I just get him to co-sign for me.

My Dad agreed but when he found out that he would have to fill out a loan application, provide tax returns and bank statements and agree to have his credit report run, he balked. He was fiercely private and did not want even me to know his financial details. When I shared his feelings with the loan officer, he suggested that the only other way that my Dad could help me was to give me enough money to reduce the loan amount to a point that I could qualify for the loan. Fortunately, my Dad agreed and I was able to buy that home. By the way, I remember I paid $107,500 for my first house!

Not only does a co-signer have to provide all of that detailed financial information but since he would have become a co-borrower on the mortgage, his good credit would have been subject to my willingness and ability to make the mortgage payments on time. I can’t tell you how many times I have seen parents co-sign for a car loan for their son or daughter only to find out that their credit has suffered because their kids have not been timely with their car payments. The same is true with a co-signer on a mortgage, only a late mortgage payment presents a much bigger black mark on one’s credit scores.

Unlike in years past, the conventional mortgage industry no longer allows a co-signer to compensate for a borrower’s inadequate income except for one exception: FHA. The FHA loan program is the one bright spot in the mortgage industry today and is the only loan program that allows a borrower to qualify for a mortgage with the help of a co-signer.

In this case, a co-signer’s income, assets, debts and credit would be combined with the homebuyer’s income, assets, debts and credit and the combination would be treated as one borrowing entity. The combined monthly Debt-To-Income ratio (DTI) would be looked at as though it were one borrower. If this combined DTI , along with the assets and credit scores, was acceptable, the FHA loan would be approved.

This is only one of the features that sets the FHA loan program apart from other programs. FHA also allows a borrower to buy a home with just 3.5 percent down and that down payment could be all gift! Additionally, to help out struggling homebuyers, FHA allows the sellers to pay all of the buyer’s closing costs, up to a maximum of 6 percent of the sales price.

No wonder some are saying that it is cheaper to buy a house than to move into a rental that may require first and last month’s rent as a deposit. Before securing a mortgage, be sure to consult with an experienced FHA lender. Many lenders seem to offer it but few are experienced.

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.