According to a study by, most mortgage applicants do not qualify for the best mortgage rates available. So those with bad credit needn't feel like ugly stepchildren; they are in a very large boat these days. Even more shocking is the fact that one third of folks out there may not be able to qualify for ANY mortgage. There are several reasons for this:

  1. Credit scores have dropped during the recession. Incomes have been scaled back; jobs have been lost.
  2. On the flip side, mortgage companies have tightened their underwriting guidelines. Those with scores below 620 may not receive a single offer from mainstream lenders.
  3. Mortgage insurance is much harder to get. If you have less than 20% down, your options may be limited, especially if you are trying to buy a condo in Florida. You may have to confine your search to FHA-approved projects and stay withing FHA loan limits.
  4. FHA is tightening up its guidelines too. It has not only imposed credit limits of 580 to get a 3.5% down loan and 500 to get any FHA loan, but it is withdrawing its approval from lenders with high default rates, even if they adhere to FHA guidelines. This has prompted lenders to add overlays -- that is, stricter guidelines than those required by FHA -- in order to minimize the chance of losing their approval.
  5. Subprime lenders have largely exited the marketplace.
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So what should a would-be homeowner do?

First, try looking where lenders specializing in credit-challenged borrowers are -- this site, for example. Fill out the form and see what you qualify to get or what you need to do to get qualified.

Second, work on improving your credit score. Every twenty point increase gets you a .12% improvement in your mortgage APR according to

Third, get a larger down payment. You may not be able to get an FHA loan with a 600 credit score and 3.5% down. But you may with 5% or 10%. The fastest way to increase your down payment is to find a cheaper house to buy. Then, negotiate with your home sellers to get them to pay your closing costs. That leaves you more money for a down payment.

If you can find a house with a payment lower than the rent you pay now, you have a better chance of getting a loan approved because you have a history of successfully paying that much each month.

Take a home buyer class approved by HUD. It shows you are serious and increases your chance of being successful with your home buying experience.

All of these things can increase your chance of getting approved for a mortgage and having a positive experience when you buy your home.