New mortgage regulations: creditworthy or bust

Figures holding magnifying glass over credit report

While tougher mortgage lending standards could prove a good thing for taxpayers and the housing industry, those who are looking for a piece of the American dream but lack perfect credit might have a harder time achieving their goals.

The Dodd-Frank financial reform law is spurring many changes in the financial services industry. Among the regulations the bill imposes is one that directly can influence how poor credit applicants will fare.

In years past, those with imperfect credit might have sought out the assistance of a mortgage broker to find loan opportunities. Because of the more extensive work a broker had to do on behalf of a credit-challenged client, they could earn a higher commission.

For them, it was worth the extra sweat to help bad credit applicants get matched up with the right lender.

Now, brokers can no longer reap the rewards of higher commissions for coordinating higher-interest loans. Instead, broker commissions will be based on the home loan principal, not the loan's interest rate or associated fees.

The change was enacted to prevent predatory lending practices largely blamed for the housing crisis.

Brokers essentially will have no incentive to find bad credit loans. They can’t earn any more money for the more work they do.

This doesn't mean borrowers with poor credit will be shut out of the market entirely.

You can get an FHA loan, designed specifically for home buyers with lower credit or more debt. Those loans are available through most lenders and require a down payment of as little as 3.5%.

Still, the smartest move is to try to improve your credit score long before applying for a home loan. Our 7 smart moves to improve credit scores can help.

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