Qualifying for a Bad Credit Mortgage Today: 4 Myths and the Facts You Should Know

By Barbara Marquand
Mortgage Credit Problems Columnist

In the wake of the mortgage meltdown, it's hard to keep up with all the financial headlines. Misconceptions about mortgages for bad credit abound. Here are four common myths and the facts you should know.

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1. It's impossible to get a bad credit mortgage these days.

It's harder to qualify for a mortgage now than a few years ago, but it's not impossible, even if you have less-than-perfect credit. Gone are the riskiest lending practices, such as giving mortgages to people with bad credit based on stated incomes. Lenders require more documentation than before the crisis blew up, but that's not a bad thing. If you have bad credit, you might not qualify for the lowest mortgage rates available today, but because rates are so low to begin with, you could still qualify for a rate that's affordable.

2. ARMs are evil.

Adjustable-rate mortgages got a bad name because of some of the more exotic ARMs that were written before the mortgage crisis. Payment-option ARMs, for instance, let borrowers choose among various payment alternatives each month, including interest-only payments or minimum payments that were insufficient to cover the interest due. Once the loans were recast, many borrowers couldn't afford the higher payments and they owed more than their homes were worth.

Lenders have stopped writing those highly risky ARMs that earned such a bad reputation.

Conventional hybrid ARMs, which feature low fixed-rate periods, continue to make sense in many cases, particularly for buyers who know they'll sell before the rates are reset.

3. You must have a big down payment to qualify for a poor credit mortgage.

FHA loans still require only a 3.5% down payment, and they remain the prime choice for first-time buyers and those with less-than-perfect credit. Although there's been talk of raising the down payment requirement, the level has stayed put, except for borrowers with credit scores below 580, who must put down 10%.

4. Once you have bad credit, you're stuck with it.

Most credit missteps stay on your credit reports for seven years, but their impact on your credit score fades with time, so even with a big financial setback, you can improve your credit score significantly in a couple of years if you pay your bills on time and get caught up on past-due accounts.

Before you start filling out mortgage applications, get copies of credit reports to fix any factual errors, learn your credit score to see where you'll stand with lenders and get quotes to compare mortgage options.


http://www.federalreserve.gov/ / http://portal.hud.gov/

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