SANTA CRUZ (May 16, 2009) - Affordability is a relative term. Even when the house payments and incomes are the same, a house payment that may be affordable to one family budget may not be affordable to another.

As a mortgage planner, consultant and originator, my job is to discuss the mortgage options that are available to my clients. It is up to them to decide how much they can afford to spend on their monthly Principal, Interest, Taxes and Insurance (PITI). Given the present state of the guidelines being offered by the mortgage industry, borrowers are able to borrow nearly as much today as they could when documentation requirements were so much more lax.

It is interesting to note that readers and borrowers often respond in disbelief when I state that a borrower can spend up to 65 percent of his income on his PITI. Most borrowers would not want to spend that much on their house payment but, in ideal situations, the mortgage industry allows it. An ideal situation would include a minimum of 20 percent down, a loan amount under $417,000 and substantial reserves in the bank.

Let’s look at a median priced home here in Santa Cruz County, which today is about $400,000. That means there are as many homes selling above $400,000 as there are homes selling for less than $400,000. If we assume that the buyers who want to buy a $400,000 home are short on cash, they will be pleased to hear that they can buy it with as little as $14,000 for the down payment. In this case, their PITI (including mortgage insurance) will be $2711 per month. Assuming this couple has no more than $500 per month in car payments, credit card debts, etc., the minimum annual income to qualify for this house payment is $70,000. If the incomes are split equally between two borrowers, each will have to make at least $2916 per month.

The numbers in the above example mirror our experience with the automated underwriting engine that we use for FHA loans, which has allowed a borrower to spend up to 46.9 percent of his debt on his house payment or 55 percent of his income on all of his combined monthly long term debt including his house payment, car payment, credit card payments, etc. However, these ratios are not considered affordable by everyone. Some authorities would have us believe that to be considered affordable, a house payment should represent no more than about 30 percent of a borrower’s income. If we applied that standard to the above example, the income required to purchase a $400,000 home with $14,000 as a down payment would be $108,000.

One could compare the $70,000 minimum income required to buy a median priced home today with an income of $133,000 that would have been required to buy a home at $757,000, which was the median price of a home in Santa Cruz County in 2007. Homes are obviously more affordable today than they have been for a long, long time.

When it comes to determining how expensive of a home to buy, prospective borrowers should not confuse what is available with what some call affordable. Borrowers must make their own determination on what is affordable and how much they are willing to spend on their house payment.

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.