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For poor credit mortgage borrowers, the Federal Housing Administration (FHA) offers government-backed loans that are often a better deal than non-government loans. That's why it was news when, in October 2011, temporary loan size increases -- authorized by Congress in 2008 to help relieve the effects of the housing crisis -- expired.

For a while, these "jumbo conforming" mortgage limits, which raised the FHA loan limits to $729,750 in some areas, went away. Prospective borrowers in high-cost areas were particularly out of luck, because lenders impose stricter guidelines for jumbo mortgage approvals. Provisions of the Housing and Recovery Act dropped loan limits to 15 percent more than median home prices -- capped at $625,500 rather than $729,750 for high-cost areas.

However, in November, Congress raised the FHA loan limits, restoring them to their recent, higher levels. The increased mortgage limits are in effect until 2013. This step makes it easier for those who need the flexibility of FHA's underwriting to get approved for a new home loan or mortgage refinance.

If you already have an FHA loan, the new limits mean you may be eligible for streamline refinancing at higher limits. Underwater homeowners with FHA mortgages can refinance with no credit check. You may not even need an appraisal.

The FHA loan advantage

To see why having FHA loans as an alternative is advantageous, take a look at some typical jumbo mortgage guidelines. Here's what you're up against if you try to buy or refinance in an expensive area like San Francisco, Calif., or Arlington, Va.

• You must have a 20 percent down payment or 20 percent home equity, because mortgage insurers won't insure jumbo mortgages.
• Those with less than 35 percent home equity or down payment need a 720 minimum FICO score, and everyone else needs at least 680 to qualify.
• Investment properties not eligible.
• The maximum debt-to-income ratio is 45 percent.
• A second home purchase requires a 35 percent down payment.
• Declining markets reduce loan-to-value by an additional 5 percent in Arizona, California, D.C., Florida, Michigan and Nevada.

Qualifying for an FHA loan

FHA may allow lower credit scores, but that doesn't mean that people with bad credit automatically get mortgages. Your credit problems must be behind you: You must be paying your bills on time and not accruing any more collection accounts, judgments or other black marks. You must also be able to prove that you have sufficient income and stable employment.

However, if you have truly overcome your credit problems, an FHA mortgage could make it easier for you to get into a home of your own -- even in an expensive neighborhood.

I don't know of anyone who purports to like government. Taxes, potholes, lost mail--everyone's got a gripe. But if you have bad credit you should love government, and you should be concerned about an impending shutdown. These days, home loans for people with bad credit are pretty much limited to government loans like VA, FHA, and USDA. But even if you don't have bad credit, mortgage lenders will have a harder time processing and funding your mortgage. If most of government isn't functioning, the following will be affected:

Income verification - all lenders

Before funding your home loan, most lenders must check your income documentation against what the IRS has on file. It's just too easy to PhotoShop a W-2 and a pay stub, so lenders have to double-check your income. This verification is required by Fannie Mae and Freddie Mac Quality Assurance and any lender that doesn't do this may have to buy back your loan if you default. If the IRS is on furlough, lenders will not be able to obtain tax transcripts. This means your mortgage rate lock could blow while lenders try to verify your income and close your home purchase or mortgage refinance.

FHA

I have heard that HUD will probably not support FHA Connection, its automated service for approved FHA lenders, during this down time. Therefore, mortgage lenders will not be able to order case numbers or perform other functions which require this service. Lenders need your FHA loan to have a case number before they can process your application, order an appraisal, or submit your loan to an Automated Underwriting Service (AUS).

Rural Housing (USDA) loans

It is unclear what the impact to USDA's Guaranteed Underwriting System (GUS) will be since that system was created after the last government shutdown in 1995. However, it is expected that the system will not be available. In addition, lenders will not be able to get conditional commitments during the shutdown. This could be a problem--a conditional commitment is given once a state-level USDA underwriter approves the loan, funds are also allocated once the loan is approved. Once you have a conditional commitment, you have 90 days to close your loan or your funds are forfeited!

VA mortgages

The system through which VA appraisals are ordered will not be available.

Fannie Mae and Freddie Mac

They used to be private; now they are owned by the government. They may not be able to communicate with the needed oversight people, so any problems that come up may go unresolved.

Government is a necessary evil, but if you're trying to get a mortgage closed, government becomes a lot less evil and a lot more necessary.

A Nevada case illustrates the extent that we trust people who act as though they have a right to our money. According to a news story, two men, Joseph Yorkus and James Bartczak, set up a company called Great Western Business Services and set out to defraud homeowners. They allegedly sent letters to homeowners informing them that their mortgages had been transferred from Bank of America to Great Western. The letters instructed the homeowners to make their mortgage payments to Great Western rather than Bank of America even though B of A still actually owned the loans. So many of those who complied with the request are now behind on home loans, dealing with credit problems and at risk of foreclosure because B of A didn't get the payments; instead the scammers took the money.

But mortgage payment scamming is only part of the picture.

The cons also allegedly set up several other companies for the purposes of collecting other payments and bilking folks out of money for bogus mortgage modifications services.

Economic times are tough. The rules apply more than ever.

If someone calls or writes you about payment for something, whether it's an old collection account, a new mortgage payment, or a service, don't part with your money without knowing who you are paying and what you're paying for.

Loan servicing changes come with TWO notices.

Keep sending your regular mortgage payments to the same address until you get TWO notices (also called transfer letters). The first will be from your current lender/servicer and the next will be from the bank taking over your loan. You have plenty of time to make the switch and should not have to worry about payments being reported late to credit bureaus. When in doubt, call your current loan servicer and find out if your mortgage has been transferred before you send money elsewhere.

Collection accounts are not always valid

Just because someone calls you from a collection agency doesn't mean you owe money. First, a bogus company could be trying to con you into sending it money you don't owe, or money that you owe to someone else. Cross-check any collections with the original creditor before issuing payment. Second, if a collection is more than a few years old, you may still owe the money but the collector can't force you to pay it. That's because there are statutes of limitations on debt. Paying an old collection could even hurt your credit rating by turning an old derogatory entry into a new one and increasing the weight it gets in your score compilation. So any time someone asks you for payment, be very sure that you owe the debt and that you are paying the right company.

Don't pay in advance for services.

If a mortgage modification company claims a high success rate and wants to help you with your loan (for a fee of course!), make it earn that money before you pay. It is now illegal for most providers to charge you an upfront fee for mortgage modification services; they have to get you a modification agreement before they get paid. And don't be swayed by claims of 100% money back guaranties either. Many have found that trying to collect on these promises is as difficult as trying to get their loans modified in the first place. Finally, attorneys ARE allowed to charge up-front retainers for modification services. That's because they have to conform to strict rules about escrowing your funds, applying them to actual services, and returning them as agreed.

In the mortgage crisis, smaller may be better. A story in the Washington Post indicated that smaller local banks have taken advantage of the paralysis of large institutions and thrown themselves back into local lending with a vengeance. Other studies indicate that especially with lower-income borrowers, smaller lenders did a much better job at keeping them in their homes during the financial crisis.

The difference between lenders was startling, even with very similar pools (controlled for mortgage product, income, credit score, and debt-to-income ratios) of low-income borrowers. in this case, those who qualified for mortgage revenue bonds (MRBs). For some lenders, fewer than 9 percent of their MRB borrowers were ever 60 days late in making a payment. However, for other lenders, as many as 37 percent of their customers were similarly late in making payments.One Indiana study tracked 5,000 higher-risk home buyers and found that those who borrowed from local lenders were much less likely to be late on their mortgage or enter foreclosure than home buyers with loans from non-local lenders.

Similarly, an examination of 20,000 Ohio homeowners found that higher-risk home buyers with loans from banks with branches close to their new homes (less than ten miles) were significantly less likely to default on their mortgages.

Why would your success at home ownership depend on who's lending the money?

1. Investment in local communities Local banks may have a greater interest in supporting their communities because the domino effect of a local failure is felt quickly and keenly. One small business goes under, several folks lose jobs, less money is put back into the neighborhood, others feel the pinch, and more failure can result. The contagion could blight the town and its bank. So there may be more incentive to help right away.

2. The risk is retained When a local bank keeps your loan on its books and doesn't sell it to investors who might be hedge fund managers thousands of miles away, it has more flexibility to help its borrowers weather a hard time.

3. Different underwriting criteria. Large banks use highly-standardized underwriting, looking at credit scores and various accounting ratios to issue pass / fail grades. But local lenders often place more weight on other factors, such as how long you’ve been working for your current employer and whether you make regular deposits into a savings account.

4. Borrowers feel more obligation. The community obligation cuts both ways. Many borrowers have a relationship with their local bank, having check and savings accounts there, and may feel more pressure to make their payments. And some banks provide more education and information to riskier borrowers, equipping them to be better homeowners.

Find a local bad credit mortgage lender now.

Use the form on this site to get offers from lenders licensed to do business in your community.

Today I read a blog post entitled "What lenders don't want you to know about shopping for a mortgage online" and decided that it contained enough misinformation that I had to correct it. Plus sometimes I get the urge to make fun of people. The blogger in question works for a lender and I guess figured that his potential clients would be more likely to stay with him if he could convince them that burning gas and shoe leather is a better way to get a home loan. Interestingly, he claims that he doesn't think much of the Internet, but then goes to the trouble of creating a blog...

Which brings us to the advantages of shopping for a bad credit mortgage online.

It allows you to obtain the most information in the shortest period of time. It allows you to remain anonymous until you decide that you want to move forward. And it lets you get your quotes fast enough that you can make meaningful comparisons. Here are one blogger's fantasies about mortgage shopping online:

"If you shop online you are only a number to the loan agent, not a person."

Newsflash, Champ. You, the lender, are only a number to your clients -- try offering them a significantly higher rate and a boatload of extra fees and see how much they care about the cookies in your office or the birthday card you sent them. And just because you listen to their life story and nod in the right places doesn't mean you are best at evaluating mortgage programs, analyzing your client's financials, and getting her approved for a loan. Conversely, just because a loan agent can fire off a competitive quote in minutes doesn't mean he isn't interested in your uniqueness or that she doesn't care about your plans for the home or your credit problems.

"The lenders you'll deal with offer one-size-fits-all programs."

Nothing could be further further from the truth. Online, you can search for FHA lenders, bad credit mortgage loans, USDA mortgages, adjustable rate home loans, home equity loans, energy efficient mortgages, construction mortgages, rehabilitation mortgages, commercial mortgages, mortgages on investment property -- spend five seconds with Google, duh. But try walking into a local office and asking for all of those things.

"They are not willing to help borrowers with special circumstances."

Like, for example, folks with bad credit. Well, that's obviously not true or this Web site would not exist. In fact, many of the same lenders that you could call up or go visit in person also have a Web presence and dispense quotes on this very site. Loan officers don't treat their customers who contact them online any differently than they do those who come in or call (except your access to cookies and coffee will be somewhat limited). The loans are processed the same way. They are underwritten the same way. The only difference between shopping online and in person is that you have a better shot at getting what you need and the best pricing available if you get more information. Getting good information quickly is just a lot easier to do from where you are right now.

If you have an FHA mortgage and could get a lower mortgage rate by refinancing to a new FHA mortgage, you should not hold back. FHA Streamline has minimal charges, almost no underwriting requirements, and you could be owed a refund of your upfront mortgage insurance premiums (Remember, the upfront MIP was reduced from 2.25% ...

For those trying to avoid foreclosure, twenty-one states offer some form of foreclosure mediation, which can help you and your lender reach an agreement and some form of affordable solution. Here is a list of those states and the links to their programs. CALIFORNIA California Department of Corporations information on �� 2923.52, includes Servicer Application for Exemption, ...