Every week we hear about historically low rates on home loans. 30-year fixed loans are available with interest rates well below 5%, and they’re still going lower! 15 and 20-year loans offer even lower rates. Interest rates like these would have home buyers lining up to buy any available real estate in any other market. But now very few people are taking advantage of these low home mortgage rates. What’s wrong?

The biggest problem is that a lot of homeowners are upside down on their mortgages. Property values have fallen significantly in the last few years. Many homeowners are finding that their homes are worth less now than when they bought them. Cash out refinances have exacerbated the problem, and sometimes even caused homeowners to owe more than the current value of their home.

Banks will only make loans of some percentage – 80% up to 97.5% - of a home’s current value. It’s not possible for people to pay off their old loan with proceeds from a new loan with a lower balance. Whether you want to sell your house and buy another, or just refinance the one you have, this is a deal breaker. Unless a homeowner can come up with the cash to make up the shortfall, they’re stuck, no matter how well qualified they are.

In this economy the unemployment rate is high, but as concerning is the length of time it has been so high. Many homeowners have been out of work for an extended period of time. There are also a lot of people who are working jobs that are far below their qualifications - and pay less - or working part time jobs. In spite of this, a lot of them are making ends meet somehow. They’ve found creative solutions, including starting their own businesses, cutting back on spending and sending stay-at-home parents back into the work force. Still, proving to a lender that they can make payments on the new proposed loan is difficult. And this in spite of the fact that they can show that they’ve been successfully making payments on their existing loan at a higher interest rate! Even for those who have sufficient income, changes in employment can make it difficult to qualify. Two years of steady employment in the same field is considered standard by most lenders. Borrowers who switched to a different field because they couldn’t find work in their chosen field, or borrowers who took a contract position won’t qualify until they have a two year history to show.

The standards for qualifying for a loan have become more stringent. The fact that lending practices were too lenient, causing the large number of defaults that we’ve seen is to blame. So banks have tightened up their requirements. They want to see higher credit scores and lower debt ratios than they did years ago. The chances that a homeowner has a lot of cash in the bank and nearly perfect credit, after surviving employment problems, falling home values and other challenges, is slim.

First time home buyer face the same employment and strict lending practices problems that existing homeowners do, but at least they’re not under water on mortgages. There are not many first time buyers out there with great credit, a hefty down payment and sufficient verifiable income. Many of those that can buy a home now are worried that home prices will decline further and/or that they’ll lose their jobs. This isn’t a comfortable time for a beginner to take the plunge.

So those tantalizing interest rates that we keep hearing about in the news remain just out of reach. Something that’s technically true, but simultaneously too good to be true.

If you are one of those in a position to buy a new home in California, this is the time to do it. Once the market turns around, interest rates will rise quickly. San Marcos new homes

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