Beyond a Bad Credit Home Loan: Where to Turn Now
After the bad credit mortgage market collapsed, many products that were widely available have disappeared from the scene.
More than a score of subprime specialists have closed their doors.
And many banks like Washington Mutual and Wells Fargo have cut back on or eliminated subprime loans, leaving many credit-damaged buyers scrambling to find a home loan.
But now that the collapse has shaken out some of the sketchier players, some familiar and more reliable alternatives to subprime are making a comeback - but they do require some work.
The Federal Housing Administration
According to Jerry Brown, a public affairs officer with the FHA, the group wants to make it easier for low and middle income, credit damaged and first-time home buyers to get a foot in the door.
The FHA loan originated during the Great Depression when foreclosure waves put hundreds of thousands of people onto the streets.
They’re offered by private lenders but insured by the government, reducing risk, so a mortgage lender is willing to make them at favorable terms.
FHA loans used to be more popular, but they were eclipsed by easier-to-obtain subprime products. Their market share fell from 18 percent of all home loans in 1990 to less than 4 percent by 2006, according to the National Association of Home Builders.
One reason is that the application process for an FHA loan is more tedious and requires more paperwork than that of subprime loans touted during the housing boom.
Today, there’s a new push toward FHA.
The Assistant Secretary for Housing, Brian Montgomery, testified before a congressional committee in favor of modernizing the process for the benefit of “troubled subprime borrowers.”
Requested changes include:
- Eliminating a 3 percent down payment requirement, which would enable more low income borrowers to save for a mortgage
- Increasing the maximum loan to reflect the increase in home prices brought by the housing market boom
- Assigning rates by risk to enable borrowers with higher credit scores to receive lower interest rates.
The first step a prospective home buyer hoping for an FHA loan should take is to contact several home mortgage lenders.
It’s important to comparison shop because the lenders offer different terms and rates, just as with a conventional mortgage.
FHA loans with low mortgage rates can be approved with low down payments. Adjustable rate mortgages (ARMs), which can help buyers to get through the first, and often most difficult, year of ownership, are also available.
The FHA ARMs reset yearly at no more than 1 percent higher than original rates, and can rise no more than 5 percent above the original rate, thus keeping them affordable for borrowers.
Another advantage to FHA loans, according to Brown, is credit counseling that comes with, which the agency recommends. They also requires a home loan lender to help borrowers in trouble instead of simply foreclosing.
Follow our link to continue reading this CNN Money exploration of alternatives to bad credit mortgages …
August 17th, 2007 at 2:01 am
I am trying to buy a house on the Mississippi Gulf Coast. And because the FHA guidelines are so “strict” I have been denied for a loan. Two reasons: (1) after Hurricane Katrina I had creditors that wouldn’t work with, so my credit got hit worse than it already was. Up until that I was doing what I needed to do to pay my bills on time and make sure that everything was paid on time. After writing a letter and explaining, and paying the collections off, I was still told that I needed to wait until after the new year to try again. (2) I was told that I had not been at the same place of employment for the required 24 months, even though I have been in the same business for 13 years that because of my break in employment, once again, I would have to wait. My question is, why are we being accountable for a hurricane that takes our jobs? That is one question that nobody seems to be able to answer. Can you?