As mortgage requirements tighten FHA loans reign supreme

If you've tried to secure a mortgage loan with nearly perfect credit and an appropriate down payment (15-20 percent) but you were denied, chances are you weren't applying for an FHA loan.

Private lending guidelines in today's market are much stricter than in previous years. And, with good reason. Private lenders are risking their capital hoping that you won't default, leaving them with yet another bad loan on their books.

The problem

• Borrowers with problematic credit histories
• Down payments of less than 20 percent

Private lenders are concerned about a borrower's past and, therefore, requiring higher down payments to reduce their risk and exposure to a potentially bad loan. Sorry to say this, but even if you have a credit score higher than 700, you're going to face some difficulty unless you're prepared to plunk down a down payment higher than 20 percent. Your job is now to figure out how to fix your credit and save a more substantial down payment.

Your solution

Talk to your lender. Call your lender and discuss what exactly they are looking for in approved mortgage applications. This prevents you from going through a process where you'll end up being rejected.

Check and repair your credit. This seems like a fundamental solution but many borrowers find out about credit issues once the lender comes back with a rejection letter littered with concerns about their past credit history. Walk into the deal having checked your credit and dealt with any potential issues.

This may include, but not be limited to paying off a bad debt, bringing your account current and fixing any erroneous reporting by the credit bureaus.

Save enough for a substantial down payment. This is usually harder because it requires discipline and saving more than you planned for in the first place. If you were aiming for 15-20 percent, it's time to aim north of 20 percent.

Alternative: utilize a FHA-backed loan. FHA loans are backed by the government and have easier qualification requirements. The requirements are as follows:

• Minimum of 3.5 percent with preferences given to 5-8 percent down payments
• Credit score above 650

Do yourself a favor and get started on the process at least six months before you start searching for a home. Credit issues, depending on their severity, take time to resolve. You want to give yourself a head start. This way, you walk into the process informed and ready to go, rather than being mired in surprises from your credit report because you chose to go in blind.