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According to Bloomberg, the government's hamstringing itself when it comes to tackling the economic recovery. On one hand, the Treasury Department's Quantitative Easing (QEII) program used over $1 trillion in taxpayer dollars to buy up mortgage bonds, keeping mortgage rates low, and the Treasury spent another $16.2 billion on the home buyer tax credits to inject demand into the housing market.

On the other hand, Fannie Mae and Freddie Mac have tightened up underwriting standards and increased costs to the point that many people who could have been successful homeowners a few years ago don't qualify today. FHA, VA and USDA mortgages also became harder to qualify for and they cost more.

Housing leads the way--off a cliff!

At last month's meeting of the Federal Reserve, Chairman Ben Bernanke stated that housing is "a big reason that the current recovery is less vigorous than we would like." The Mortgage Bankers Association (MBA) predicts that purchase-money mortgages will drop to $432 billion this year from $473 billion in 2010.

While no one is saying that mortgages for people with bad credit should be easy to get, the current environment of backlash against mortgage applicants is an overreaction that will do nobody good.

With liberty and foreclosure for all.

Fannie Mae and Freddie Mac mortgage-qualification rules have lowered debt limits, increased down payments and put in new restrictions on condominium loans. Minimum credit scores were raised and risk-based pricing adjustments make financing more expensive, further limiting who can afford homes. FHA lenders have chosen to tighten even more than required by the agency, and the average credit scores of FHA borrowers have increased from 621 seven years ago to over 700 today.

By shrinking the pool of buyers who can close on home purchases, lenders are dragging out the recovery, increasing downward pressure on home prices and upping the odds of foreclosure.

What should home buyers with bad credit do?

People with past credit problems won't find an abundance of bad credit new home loans out there. You'll need a history of at least one year of paying bills on time and a credit score of 620 or higher to have a realistic chance of getting approved. You'll also need a stable income--at least two years of work experience, preferably with promotions or raises in there.

If you don't have that, you could try buying an owner-financed home or if you can put up a big enough down payment, there are private (hard money) groups and individuals who make home loans and bad credit is okay. You'll pay several points upfront and a high rate though, so don't consider that until you've checked with lenders on this site and seen what they are willing to offer you.