Every week we hear about historically low rates on home loans. Rates on 30-year fixed mortgages are well below 5% and still falling! At any other time, interest rates like these would have jump started the real estate market from a standstill to a frenzy in no time. So who is getting these super low interest home loans? Very, very few people. 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. Homeowners who bought their houses when values were higher now owe more than their homes are worth. Even many of those whose homes are now worth more than their original purchase price may still be under water if they refinanced their home and took cash out.

The maximum loan amount is typicallly a percentage of a home’s current value – current value being the key word. The thousands of people who owe more than their homes are worth can’t pay off their old loan with the proceeds from a new loan. 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.

Unemployment Rates have been very high for a very long time. There are more than a few people who have been out of work for years. Many more are underemployed – working part time jobs or jobs far below their qualifications and income. 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. But they can’t show sufficient income to prove to a lender that they can make a lower mortgage payment than the one they’re making now. Changes in employment make it difficult to qualify for a loan even if the income is sufficient. Two years of steady employment in the same field is considered standard by most lenders. Contract work is not considered stable until it has a two year history, even if the work is in the same field that the person was originally employed in.

Lending standards have risen. The huge number of defaults can be traced back to lending practices that were too lenient. So banks have tightened up their requirements. Requirements for debt ratios and credit scores are much stricter than they were even years ago. If a homeowner has been keeping it together through falling home values, employment problems and other challenges, the chances that they have near-perfect credit and lots of money in the bank is slim.

First time buyers face all of these problems, except for being upside down on their mortgages. Unfortunately potential first time buyers with sufficient verifiable income, a hefty downpayment and great credit are in short supply. Fear of losing their jobs or of home prices falling further has detered many of those who actually are in a good position to buy a home. Buying your first home is a scary experience. The current economic conditions don’t make it easy to take that risk.

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. New homes San Marcos