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.

1. 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.
2. 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.
3. 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:

1. 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.
2. 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.
3. 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.

Aubrey Clark is a loan officer with Lendfast.com
and writes extensively on How to get the best mortgage deals in today’s market.

Mortgage rates will likely dip even lower in 2009, bringing up the question of whether it’s better to borrow now or wait for an even better rate. Mortgage experts tend to disagree on this issue. In simple terms: if you like to gamble, then wait. If you lose sleep at night fretting that rates will soon rise, then borrow now.

Here are some things to consider about the current mortgage market:

Comparison Shop, Especially Now

In a typical economy, one loan is pretty much the same as any other, since most interest rates on 30-year fixed loans are grouped within about a quarter of a percentage point. This is not so today. With the uncertain economy, lenders vary greatly in terms of how much risk they’re willing to assume in loaning money. This is why it’s important to shop around. You’ll want to keep checking often, since home loan rates are continually in flux.

Lock in a Fixed Rate for New Loans

Disregard what you might have heard in less troubled times about the pros and cons of fixed versus adjustable rate mortgages. Nowadays, you’ll always get the best deal on a fixed rate loan, because this is the financial market that congress has designated for support. The time of securitized adjustable-rate mortgages has come to an end, so most banks don’t want to originate ARMs. Lenders no longer offer attractive rates on these risky loans.

Keep Your ARM, for Now

If you already have an ARM that is due for an interest rate adjustment soon, there’s no need to rush to get rid of it. Short term interest rates have taken such a dive that you’re likely to actually see a reduction in your monthly payment. The one-year Treasury bill yield has dropped to less than half a percent; so even if your ARM is indexed to the one-year Treasury bill, chances are you’d still only pay about 3.25% per year. ARMs that are indexed to LIBOR are adjusting to the low 4% range, which is also an excellent rate.

Monitor Your Finances

Getting one of those attractive low interest rate fixed loans is difficult, because Fannie Mae and Freddie Mac have made standards even stricter for loans they’re willing to buy or guarantee, even though both of these megalithic mortgage finance companies are now under government control

Your FICO score should be at least 720 to garner the best possible interest rate, though for a large enough fee, both Fannie and Freddie will guarantee loans all the way down to FICO scores in the mid 600s. You may also need a 20% down payment.

One of the biggest hurdles for many buyers has been the tightening of lenders’ debt-to-income standards. Monthly mortgage payments can’t be more than 28% of gross income for Fannie or Freddie conforming loans, and all monthly debt payments combined (e.g., student loans, auto loans, revolving credit accounts, etc.) can’t exceed 36% of a borrower’s gross income.

For a loan guaranteed by the Federal Housing Administration (FHA), these figures are 29% for mortgage debt, and 41% for combined monthly debt.

Carefully Consider Whether to Refinance Now

Deciding when to refinance boils to down to how willing you are to accept a certain amount of risk. Utilizing one of the many available online calculators can help you make a good analysis. A good rule of thumb is that refinancing is a good option if the new interest rate is a full percentage point below what you are currently paying, and if you don’t plan on moving soon.

The argument for waiting to refinance is that the Federal Reserve and Treasury Department are set on pushing mortgage rates even lower in 2009, and are likely to get their way. This means putting pressure on banks to keep lowering interest rates; not just on mortgage loans, but on all kinds of personal loans as well.

On the other hand, while it seems like a reasonable predication that rates will drop even lower, nothing is guaranteed. Rates have crashed so quickly that trying to wait for rock bottom may be a mistake. If the numbers work for you, you really can’t go wrong in deciding to refinance now.

Refinance-A-Home Mortgage.com offers complete mortgage information and practical tips to help you get your desired mortgage. If you need timely mortgage information or a quick and easy mortgage quote comparison you’ve come to the right place.