Getting a Mortgage Without Perfect Credit

The government keeps promoting programs designed to help existing homeowners refinance their mortgages at a lower rate, as well as get perspective buyers into homes. In other words, Uncle Sam says he's here to help.

"Phooey," say homeowners and prospective homeowners, who keep complaining that it is ridiculously hard to get a mortgageor refinance one.

Can both sides be right? Unfortunately, yes.

But if you are willing to do a bit more work than in the past, it is possible to lower your mortgage rate to 5% or arrange to buy your first home.

It is clear that there is pent-up demand to do both. Seemingly qualified buyers keep telling me they can't get a mortgage. According to Credit Suisse (CS) and others, more than one-third of homeowners hold a 30-year conventional mortgage at 6% or higher.

I will tell you what you need to do, but first we must understand what is going on in the marketplace.

a demanding lending landscape

Today it is unquestionably more complicated and difficult to get a home loan than it used to be. Burned by the recent housing meltdown they helped to create, lenders currently go over every requirement with a fine-tooth comb. They are looking for higher credit scores and more money down. Still, the situation is far from hopeless: Loans at attractive rates are still available for those with less-than-perfect credit and minimal-to-no equity.

How should one negotiate the landscape?

I checked with industry experts and here's what I learned: Banks and mortgage brokers can still get you a mortgage of $417,000 or less at the best rates through Fannie Mae (FNM) and Freddie Mac (FRE) programs if you have a credit score as low as 660 and can put 20% down. Jumbo loans, those greater than $417,000, remain more expensive.

What about more complicated scenarios?

I checked on a number of specific situations—for example, people who can put 20% down but have a credit score of only 630, or people who have a score of 630 and only 10% to put down. I found these deals can get done but not surprisingly, you will pay an additional quarter- or half-point. This means that instead of getting a 30-year mortgage at 5%, you would have to pay from 5.25% to 5.5%. Not too bad.

What about tougher scenarios, such as trying to buy or refinance with average credit, but zero to negative equity? According to expert Brian Fishman of Illinois-based DB Diamond Mortgage Group, the zero-down days are over, apart from incentives such as the soon-to-expire home buyer credits. Refinancing is possible, however.

Freddie Mac has refinance opportunities for those with mortgages of up to 105% of their appraised value. Fannie has them for up to 95%. The lower credit and low-or-zero-equity deals will cost at least a point or more above published rates. But it might get done.

don't assume your hands are tied

Believe it or not, even if your first and second mortgages total 125% of the appraised value, Fannie or Freddie may yet have programs that will refinance the first mortgage at a reasonable rate, as long as the second-mortgage holder doesn't object.

Since every scenario is different, I'm not suggesting that you refinance this type. I'm simply suggesting you weigh all reasonable options vs. assume that you have no choices.

How can you determine which opportunities are available to you and which best suit your particular circumstances? I'm still a big fan of doing homework. I recommend that you consider seeking input from multiple sources, such as your current servicer, your local bank, your mortgage broker, and your local real estate professional.

To start, I'd suggest a reputable mortgage broker. While they are being paid a commission by lenders to help place you with them, they will often get you an equal or possibly better rate by shopping for you. You are also more likely to know where you stand among the various options before you get bogged down with paperwork.

In a nutshell, if you have credit scores in the low 600s or higher, 10% or greater equity in your home, and you're paying above 6%, you should be shopping to refinance. If you're in the market to buy a home, set these levels as your minimum standards, understanding that the better your credit and the more you can put down, the better your chances of getting the lowest mortgage rate available.

No matter what you do, remember that you have options and should do your homework. If you find that you're so far under water that nothing seems to make sense, maybe it's time to seek an alternative strategy, such as a short sale. That's where we will turn our attention next.

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