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Three Steps To Getting The Best Mortgage Deals With "less Than Perfect Credit" In Today's Mortgage Market.

Mar 28, 2008
Today's mortgage market is different than anyone has ever seen in the history of mortgages. Getting your best mortgage deal may require a little homework on your part, but they are out there. Many of the mortgage programs that used to be available to home owners and future home owners are simply gone. However in the midst of this market fiasco we are seeing interest rates at the absolute lowest we have seen in years. The problem is the programs to access these rates have been narrowed down so much that only the people with the best credit can qualify for them, at least that's the conception.

The best deals on mortgages are still out there for most people with "less than perfect" credit. Our old friend FHA has been dusted off and has now moved to first place over the traditional mortgage champs, Fannie Mae and Freddie Mac. The reason is for this is the collapse of the subprime market. Although FHA is not a subprime lender it is a common sense mortgage where people with less than perfect credit can access to the best mortgage deals.

When I say "common sense" I mean that a real underwriter will look at the loan in most cases and make a determination whether or not the borrower merits a loan. With the two other mortgage giants Fannie and Freddie, the underwriters follow an automated computer model for underwriting that they rarely stray from. Not so with FHA, as I mentioned earlier the underwriter is looking for "compensating factors" that can be used to counter the negative items on your credit report i.e. a collection. In general an FHA underwriter is looking for these three qualities in a borrower.

Capacity - This is the borrowers ability to repay the mortgage. These factors include your debt to income ratio, length of time on the job or field of work and the likeliness that the job/income will continue. Generally underwriters like to see borrowers in the same field for two years and on the same job for one year. So, if you hate the job but you really want to buy a home, I suggest that you "suck it up" for at least a year then apply.

Collateral - Is simply the home you are attempting to buy or refinance. FHA loans money to the borrower and on the home. In today's market each is given equal scrutiny. If you have credit issues the underwriters want to see you buy a home that makes sense for your budget and one that is in good shape. This means you probably will not get approved buying a "fixer upper" or repossessed home. Have your realtor find you a fairly new home, in your budget that is in good shape. If you get this piece of the puzzle you are well on your way to a great mortgage deal with an FHA mortgage.

Credit - FHA does not care what your credit score is. However, this is still the toughest step of the three steps. This is where picking an experienced loan officer can make all of the difference in getting the loan or not. Basically, if your bad credit can be explained to an underwriter in these terms they will overlook the bad credit that you have had in the past. The explanation letter should be comprised as follows: Why I was bad - what happened to cause your bad credit in the past. (I forgot to pay them or never got the bill IS NOT a good excuse) I was in the hospital, lost my job, had a divorce the spouse was supposed to pay the debts, these are much better excuses.

What I have done to correct that situation - Are you paying on the collections, have you made your payments on current debts on time for at least one year, got a new job that's more stable, improved my health and so on. Basically the underwriter wants to see a measurable effort on your part to improve your situation.

Why I will not be bad again - This is where you tell the story. "I was young and got into debt early. Now that I am older I have started a family and had children and I am wiser. I believe that I will not repeat these old habits because of my new job, the money I have saved in reserves for a rainy day and a second income in the family". You should elaborate a little here but you get the point.

When putting these variable in a letter please do not write a novel. Underwriters have 5 loans a day to underwrite and they do not have the time to read war and peace. Quite frankly, they really do not care that your wife was cheating on you and ran your credit cards up and left you with four children either. The story should read like a resume, direct and to the point. Why I was bad, how I have gotten better and why it will not happen again. Follow these three steps and you are very likely to be able to buy a home. At the worst you will have to wait a year to have access to the best mortgage deals in today's market.
About the Author
Aubrey Clark is a loan officer with Lendfast.com and writes extensively on How to get the best mortgage deals in today's market.
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