When They Say No: Finding Mortgage Money

So you have the perfect home picked out, you’re already boxing up silverware and calling movers for quotes -- but you’re putting off the most important call of all: to a mortgage broker. And with good reason.

Lending guidelines have tightened considerably over the past year. While a few years ago about all you needed to get a loan was a pulse, today you’re going to need some heavy-duty documentation to show that you’re a solid credit risk to get past lending scrutiny. “It’s getting tougher, but overall that’s not a bad thing,” says Jillayne Schlicke, a Seattle-based lecturer on the mortgage banking industry. “Too many bad loans were written for too many people, it’s going to take time for the industry to right itself.”

If you fill out the application and get a no, realize that the fight’s not over. Although the sub-prime mortgage loan no longer exists, there are some alternative sources for funding that can get you your dream home:

The FHA -- The Federal Housing Administration has long been an outlet for people seeking to buy property but who haven’t met the guidelines for conventional loans. FHA loans require you to show proof of income, the source of your down payment (in order to prove it’s not a loan) and proof that the home you’re buying is correctly valued. There are also lending limits which vary depending on the state. Not all brokers are licensed to handle FHA loans so if you may be in the market for this one, make sure your broker has worked with them before.

Credit Unions and Local Banks -- If you’ve been a longtime member of a credit union or if you’ve done business with a small bank in the past, you might have a glimmer of hope there. Traditionally these institutions don’t have a large amount invested in real estate and may not have been as hurt by the real estate downturn as other banks. Although they have to follow federal lending guidelines regarding your credit risk, income and the property you’re buying, the loan manager whom you’ve dealt with in the past may be able to push your application through if it’s on the borderline.

Private Lenders and Hard Money Loans -- Although these may sound like you’re borrowing from “Jimmy the Fish” down at the waterfront, they’re actually very legitimate. An investor or a group of investors invest money by lending you what you need to buy a house. The only catch is that the terms are generally less than generous. Expect interest rates to be as high as 15 percent to 20 percent, and they’ll also want to make sure you’re putting 30 percent to 50 percent down. The goal for most people who get these loans is to improve their credit situation and refinance into a conventional loan in two years or less.

State Programs -- Various states have homebuyer assistance programs that can help with everything from down payments to mortgage insurance. They’re generally for low-income residents; however, some programs are for people in a certain profession, like teachers, or for those who participate in a state pension fund.