How To Make The Wrong Loan Choice

by Peter G. Miller
June 4th, 2007

Suppose you can’t get an FHA loan. You know, because you can’t document income, don’t have 3 percent down or recently went bankrupt or had a foreclosure. Why not try “nontraditional” financing, say an interest-only mortgage or an “option” ARM?

For the past few years such loans have been available to virtually anyone with a pulse. If you could exhale you could get a mortgage. In many cases you could get such loans with a “stated income” loan application, an application where you could estimate your income and in most cases no one would check.

But while such financing was easy to get, in too many cases it has been difficult or impossible to keep — just look at the RealtyTrac.com numbers and the incredible increase we have seen with foreclosures.

Now we see that lenders are tightening up. It is no longer so easy to get interest-only financing or an option ARM.

So is it a good thing or a bad thing that quirky loans are no longer so easily available?

I know it’s unpopular, but let’s be honest: It makes no sense to qualify for a mortgage today that quickly leads to foreclosure tomorrow.

If you can’t qualify for an FHA loan — financing with some of the most liberal standards in the world — then maybe now is not the time to get a mortgage. Maybe it would be smart to wait awhile, bulk up credit and savings, and then get a mortgage.

To find out where you stand, speak with an FHA lender. Given your current income, debts and credit how much can you borrow? If not enough, what steps can you take to get a better FHA loan next year?

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