By Francine L. Huff
Mortgage Credit Problems Columnist

U.S. home prices are expected to continue declining through at least the middle of 2010, according to economists and analysts. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. Census divisions, dropped 19.1% in the first quarter of 2009, compared with a year earlier. The record decline occurred just ahead of signs that home sales could be stabilizing and that the number of homes for sale has started to drop. However, many people--especially those with bad credit--may still having difficulties qualifying for a mortgage or refinancing.

Home Sales Rise

Existing home sales rose 2.4% to a seasonally adjusted annual rate of 4.77 million units in May from a downwardly revised 4.66 million units in April, according to the National Association of Realtors (NAR). Sales were down 3.6% from 4.95 million in May 2008. The number of homes for sale dropped 3.5% to 3.8 million existing homes, a 9.6-month supply, from the previous month. Sales figures were helped by:

• Bargain-hunters picking up foreclosures and short sales from people with credit problems
• Affordable home prices (the national median existing-home price was $173,000 in May, off 16.8% from a year earlier
• A government tax credit of $8,000 for first-time homebuyers (29% of real-estate transactions involved first-time homebuyers)
• Low mortgage rates. The 30-year fixed-rate was at 5.38% in late June, up from a record low of 4.81% in April, according to Freddie Mac.

"However, the increase in sales is less than expected because poor appraisals are stalling transactions," Lawrence Yun, NAR's chief economist, said in a statement. "Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan."

Good or Bad Credit May not Matter When Attempting to Refinance

Home appraisals can also derail attempts to refinance when homeowners have lost too much value on their property. Americans rushed to refinance as interest rates fell to record lows in April. But applications for refinancing have declined recently as rates began to edge up. Keep in mind that interest rates are still near historic lows, so it still might make sense to refinance if you have a mortgage loan with a high interest rate or have an adjustable rate mortgage (ARM).

Refinancing and taking cash out of your home could help you consolidate debt and work on fixing your bad credit. A home equity loan or home equity line of credit (HELOC), which is basically a second mortgage, could also help consolidate debt to repair bad credit. You'll have to run the numbers and talk with a mortgage specialist to decide if a home equity loan or HELOC is the right move since there is a risk that you could lose your home, which will be the collateral for the loan. However, if you already have a second mortgage and bad credit, it may be tough to find a lender willing to approve a home mortgage refinance. There are home loans for people with bad credit, but they come with higher interest rates.

Will Bad Credit Keep You from a Refinance Loan?

Many Americans with declining home values have had a tough time refinancing on their own, but have taken advantage of the Barack Obama administration's housing rescue plan to refinance or modify home loans. Some homeowners who were underwater on their loans, or owed more than their properties were worth, have been able to refinance even with bad credit as long as they were still current on mortgage payments. The government's plan also has helped some people who couldn't qualify to refinance with bad credit set up a plan to modify their mortgage payments.

Will There Be Another Wave of Foreclosures?

U.S. home foreclosures rose 18% in May 2009 from a year earlier, according to RealtyTrac. Some housing experts expect another found of foreclosures to hit people who have specialized ARMs because many of them are scheduled to reset over the next 18 to 24 months. Also, many homeowners who may not have had bad credit until they experienced a job loss could end up defaulting on prime mortgages. As a result, economists say more Americans are expected to lose homes to foreclosure and home prices are expected to fall another 20% before the real estate market begins to show some real improvement.

Other Recommended Refinance Articles

• Five ways to know if you should refinance
• 5 tips for prospective home refinancers
• 2 ways refinancing can help your finances