Believe it or not, today’s mortgage requirements are easier than they were when I began originating mortgages in 1986. The mortgage industry has gone through many transformations over the past 29 years. Not only were interest rates in double digit territory but down payment requirements and debt-to-income ratios were much stricter back then. Although there were exceptions, ten percent down payments were considered the standard minimum; sellers were hesitant to accept offers from borrowers who only had five percent down because they were rare. Today, down payments as low as 3 percent are not uncommon.
The key indicator to determine whether or not a borrower makes enough money to qualify for a mortgage is the Debt-To-Income (DTI) ratio. This is the ratio of a borrower’s long term monthly debts divided by the borrowers’ gross monthly income. The long term debts include the Principal, Interest, Taxes and Insurance (PITI) of the proposed home plus any car loan payments, student loans, child and spousal support payments and credit card monthly minimum payments. The standard acceptable DTI ratios were around 33 percent; today we can approve loans with DTI ratios up to 50 percent.
From the 1980s to 2007 there was quite a long period of ‘relaxed’ lending. In a quest to generate more mortgages, which would produce more profits for Wall Street, lenders began offering mortgages first without requiring income documentation (stated income loans) and then soon after, mortgages were being offered without requiring any documentation at all (no doc loans). Due to these relaxed standards, it is now a well-known fact that many folks were able to buy homes during that period who should not have and tens of thousands of those homes ended up in foreclosures.
Fast forward to today and we find the mortgage industry has perhaps over corrected itself by imposing extremely stiff documentation requirements for borrowers. Just ask anyone who has recently obtained a purchase or refinance mortgage and you will hear all about how much paperwork was asked for before their mortgage was approved. The good news is that the very basics of qualifying for a mortgage (cash and income required) have actually become more relaxed.
Of course, home prices were much less expensive then with the average price in 1986 from $150,000 to $200,000 but the interest rates were also much higher at 10 to 12 percent. Today, home prices in Santa Cruz County are hovering around $750,000 and interest rates are just above 4 percent for a 30 year fixed rate. As interest rates and home values are both heading north, a prospective homebuyer would be wise to be making a move sooner rather than later.