Today's lending environment has fewer options for bad credit borrowers. If you have spotty credit, learn about the options for low-risk, federally-backed mortgages that won't surprise you with ever-rising interest rates.

Home seekers with bad credit already know about the rock and the hard place-that is, the choice between a risky, high-priced loan, and not buying a home at all. Fortunately, there's another option: The federal government has several programs that can put lesser-qualified borrowers into affordable, lower-risk mortgage loans.

Hard times for low-score borrowers

Frankly, if you have bad credit, you're going to have a tough time finding a mortgage that you can afford. If you've started looking already, you might get the feeling that lenders aren't interested in working with you. It's nothing personal-they just don't have the same kinds of options that they did just two years ago. This doesn't make it impossible for you to find a loan, but it puts pressure on you to learn more about currently available options.

Since lenders may not want to take a chance on you, you'll need to find some federal backing. This might come in the form of mortgage insurance from the Federal Housing Administration (FHA), or from funds provided by Fannie Mae or Freddie Mac.

Help from the feds

If your main obstacle is a low credit score, an FHA mortgage program might be the solution. The FHA provides mortgage insurance to qualified first-time buyers who can come up with a 3 percent down payment. This particular insurance eliminates much of the risk for lenders, allowing them to offer you a more competitive rate.

While the approval process for an FHA loan considers your recent payment history, it does not look at your credit score. FHA programs are therefore ideal for borrowers who are putting their rough times behind them, even if the credit score has yet to reflect the change.

Another option is to try to qualify for a Fannie Mae or Freddie Mac loan program. These programs support the mortgage industry by purchasing qualifying loans from lenders, who are more willing to make loans to borrowers who fit the parameters they set. They know that these loans can be sold in return for much-needed capital.

Types of government mortgage loans

Fannie Mae has two main programs for credit-challenged borrowers, MyCommunityMortgage and Expanded Approval mortgage. Both programs provide up to 100 percent financing for approved borrowers.

Freddie Mac offers the Home Possible mortgage and the Affordable Merit Rate. Home Possible serves low- to moderate-income borrowers who don't have the cash for a big down payment, while Affordable Merit Rate caters to borrowers who've had credit problems.

As you prospect for a suitable bad credit mortgage, ask lenders specifically about these programs. If you don't qualify now, find out why. With a little strategy and determination, you might uncover an escape route between that rock and hard place.

Published on February 11, 2008