With a less than stellar credit score, it will take some time and effort on your part to obtain a mortgage refinance. You will need to carefully review your credit report. Look for any discrepancies and if at all possible get them corrected immediately. Even if your report does not show the corrections, get documented proof to show lenders.

You will need to take some time to thoroughly research lenders that are willing to work with you. There are lenders that are willing to work with people who have below average credit scores, but you will need to seek them out. Banks and credit unions are usually the least generous, so stick to looking for mortgage lenders that specialize in bad credit home loans.

Once you have found two or three lenders that may be willing to work with you compare their rates and fees. You should not expect to get advertised rates, which currently are just below 5%. If you can obtain a rate that is at least 1% lower than what you are currently mortgaged at, it very well could be worth it for you to refinance. Be sure to watch out for closing fees and extra bad credit fees that lenders may tack on. Carefully compare fee and interest rates between lenders before making a decision.

Fill out the applications for the companies you have narrowed your selection to. Be prepared to show typical documentation including proof of employment, bank account statements, etc.

Finally, realize that there is still the chance you could be turned down. Don’t let that stop you from giving it a shot.

Bernanke made it clear that the state of the U.S. economy is still frail. “The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible.”

He also said, “Unfortunately, reduced bank lending may well slow the recovery.” According to the numbers, that has been true in recent past. The Fed’s senior loan officer survey from October reported that 25 percent of lenders had tightened their mortgage standards of single-family prime loans since the last survey in July. Not a good sign for the mortgage markets when things are looking so tenuous.

“We continue to encourage banks to raise additional capital to support their lending. And we continue to facilitate securitizing through our Term Asset-Backed Securities Loan Facility (TALF) and to support home lending through our purchases of mortgage-backed securities,” Bernanke said.

So, the Fed will almost definitely be leaving its target interest rate alone, meaning mortgage interest rates have a shot at staying low and close to the five percent mark. Record low rates have been one of the only consistently positive indicators in the market for the past year.

On the overall future of the economy Bernanke summarized, “My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds-in particular, constrained bank lending and a weak job market-likely will prevent the expansion from being as robust as we would hope.”

Sadly, the housing market in these tough economic times has hit a new dismal record. According to the Mortgage Bankers Association, mortgage applications for home purchases sank to a 9 year low last week. With reports that the economy is improving, this is not good news for the housing market, which appears to be on the decline again.

What is the cause of the decline? In these tough economic times, where unemployment is at a 25 year high, potential home buyers are leery. Even with record low interest rates and a first time home buyer tax credit, it appears that many people are not willing to take the leap to home ownership. Looking ahead with the homeowner’s tax credit extension now including all buyers, not just first-timers, it will be interesting to see if home sales will rise or continue to fall. We can only hope for the rise.

At the same time, current homeowners, especially those struggling financially, are looking at cutting their bills in any way possible. These record low interest rates are promising news to homeowners who are struggling, as long as they can qualify for refinancing. Homeowners who have not already refinanced are now putting in applications. Some homeowners who have enough equity in their home are also looking to consolidate other debts into their mortgage. If approved, this can give some homeowners much needed payment relief. If rates stay below 5%, applications for refinancing could very well stay steady or continue to rise.

Good news, right? Yes, because it means fewer foreclosures as a result of underwater loans.

“The decline in the percentage of homeowners with negative equity is a positive sign and is directly attributable to the stabilization of home values from the second quarter to the third,” said Zillow chief economist Stan Humphries, as quoted in a CNN article.

Yet the less obvious side of the story is that the number of underwater loans is decreasing simply because so many homeowners are losing their homes to foreclosure, removing themselves from the mortgage scene altogether.

The number of underwater loans may be due to rise again in the near future as well, as a combination of factors is converging to create another wave of foreclosures.  There are tens of thousands of risky option ARMs and interest-only loans perched to reset during the next year and experts are predicting many of those borrowers will not be able to keep up with their new, dramatically higher payments.

Plus the national unemployment rate just topped 10 percent, which could add to the foreclosure frenzy as borrowers who have recently lost jobs have no income to pay their mortgages.

All this makes it seem like we may still be several months or more away from true housing market stabilization. That’s good news for first-time buyers, but not so pleasant tidings for current homeowners, especially those looking to sell.

The current tax credit has been in effect since January as a piece of President Obama’s economic stimulus plan and has allowed first-time homebuyers an $8,000 tax credit. It has been credited with jump starting the fallen national housing market, resulting in increases in existing homes over the past several months. Many feared that if it were allowed to expire as it was set to on December 1, that the real estate market would see a dramatic drop again.

Here’s how the extension works:

Buyers must be entered into a mortgage contract for a home purchase by midnight on April 30, 2010 and must close on their sale by midnight of June 30, 2010. First-time homebuyers will still receive $8,000 in tax credits, while previous homeowners (specifically those who have owned their current homes for at least five years) will be allowed $6,500 in credits.

The purchased homes must be principal residences and may not exceed $800,000 in price. Those with an income of $145,000 or more ($245,000 if married filing jointly) are not eligible for the credit and those with incomes between $125,000 and $145,00 would receive a reduced credit.

Many hope that this extension will get things moving in not only the lower-priced end of housing but in the middle-priced range as well. Lawrence Yun, chief economist for the National Association of Realtors believes that it might stem potential buyers’ fears about falling home prices.

“Once the consumer fear factor disappears, then housing can move into a sustainable recovery,’’ Yun said. “I think we will be there by the middle of next year.’’

I like how Patti Ketcham put it, a Tallahassee real estate firm owner, as quoted in the Boston Globe. “It’s huge. I think it’s going to have a big impact. I hope I’m right. Golly, I hope I’m right.”

In a nutshell, the Times story by Gretchen Morgenson suggests that a home dweller being threatened by a bank with foreclosure on a first or second mortgage should demand proof that the bank still holds the loan paper.

Crazy as that sounds, Ms. Morgenson reports at least two homeowners have been able to continue living in their houses despite foreclosure threats because the banks couldn’t produce the paperwork which would show a mortgage had been issued.

If a bank has “lost” the paperwork associated with a loan, it can’t foreclose on that loan, Ms. Morgenson’s story suggests, and she reports on two cases in which that argument has held up in court.

How can banks “lose” paperwork associated with a loan?

The New York Times reporter suggests - none too delicately - that it could have to do with the speed with which banks “shoveled” secondary and subprime loan paperwork into securitization trusts which were peddled on the assurance that enough of the paper was good to warrant the price of the whole wad.

If you think banks couldn’t operate in such a haphazard manner you probably haven’t been reading the newspapers for the last year or so.

Now, according to The New York Times, judges are telling bankers to “go fish.” In other words, if you can’t find the paper that says you made a loan because that paper was dumped haphazardly into a bucket and sold God knows where, you have no claim on the property which was used as collateral and you can darn well quit hassling the people who live there.

As Ms. Morgenson put it, “Bookkeeping is such a bore, especially when there are billions to be made shoveling loans into trusts like coal into the Titanic’s boilers. You can imagine the thought process: Assigning notes takes time and costs money, why bother? Who’s going to ask for proof of ownership of these notes anyhow?

“But…bankruptcy judges across the country are increasingly asking these pesky questions.”

Now, however, Americans are house poor and many are and have been at the mercy of high adjustable interest rates. In the most recent study from mortgage finance giant Freddie Mac, it looks like homeowners are overwhelmingly using refinance loans to lower those rates and cut their monthly payments.

Freddie Mac reported that in the third quarter of 2009, refinanced loans netted up to a total $3 billion in payment savings for the first year of the new mortgages for participating homeowners. One half of all those who refinanced conventional mortgages lowered their annual mortgage interest rate by 17 percent or more!

“Homeowners are benefiting from an extended period of very low interest rates. In the first nine months of 2009, interest rates on 30-year fixed-rate mortgages have averaged 5.1, the lowest such average in the 38-year history of Freddie Mac’s Primary Mortgage Market Survey,” noted Frank Nothaft, Freddie Mac vice president and chief economist. “At the beginning of the year, only borrowers who still had a solid equity cushion could take advantage of the low mortgage rates, but through the Homeownership Affordability Refinance Program that got underway in April, borrowers who have a loan owned by Freddie Mac or Fannie Mae can refinance that loan even if they have no home equity. As of August 31st, over 93,000 borrowers had taken advantage of this opportunity according to the Federal Housing Finance Agency, with the bulk of those occurring in July and August.”

And 64 percent of prime (good credit) borrowers who refinanced conventional loans in the third quarter retained the same principal balance or actually reduced it. That is the highest recorded percentage in six years. Only 36 percent of borrowers refinanced with “cash-out” loans. In total they pulled out $20 billion of home equity, the lowest amount in almost a decade.

Bottom line: If you can qualify, refinance now for payment savings. Interest rates are likely to rise starting sometime in 2010 and may not reach today’s lows for a long time to come.

The average rate on a 30-year fixed rate mortgage inched up to 5.03 percent, excluding points, from 5.00 percent the week before. One year ago, however, the average rate was more than a point and a half higher at 6.46 percent.

The average rate on a 15-year FRM grew to 4.46 percent, up from 4.43 percent last week and one-year adjustable rate mortgages carried an average rate of 4.57 percent, up slightly from 4.54 percent.

“Interest rates for 30-year fixed mortgages have averaged just below 5 percent this year, which is the lowest 10-month average since the survey began in 1971,” said Frank Nothaft, Freddie Mac vice president and chief economist. “As a result, refinance activity has accounted for almost seven out of ten mortgage applications on average this year.”

So why didn’t rates move much this week? According to a survey from BankRate.com, the incoming economic data sent mixed signals to the mortgage markets, as investors quickly bought up securities at a government debt auction early in the week, then consumer confidence and new home sales were down.  But then again, existing home sales showed strong gains, jumping up 9.4 percent in September from the previous month.

And although it is anyone’s guess what will happen to interest rates in the coming week and month, by historical standards there is no doubt that rates are fabulously low. If you are a potential homebuyer sitting on the fence, pre-boom home prices coupled with today’s rates make now a really good time to buy.

While the fact that the Federal Reserve felt confident enough to raise the rates is encouraging, the drop in mortgage applications and refinances put a damper on this news. According to the Washington Post, new home purchases dropped to a 402,000 annual pace, or 3.6 percent, in September. It was the first time since March that new home sales declined from month-to-month. The number of mortgage applications fell 5.2 percent in the third week of October, while lenders saw a 16 percent drop in applications from homeowners looking to refinance.

The news of the decline in mortgage applications for new home purchases is a bit discouraging for the housing industry. The $8,000 tax credit for first-time home buyers had helped provide an incentive to purchasers and drive new home purchases. However, with the tax credit ending and no definite word yet on an extension combined with the continuing rise in mortgage rates, the numbers may not improve for a while.

Rising home prices may also be playing a part in the declining number of applications. While an increase in home prices does signal growing buyer confidence and an economic upswing, it may be discouraging some buyers from purchasing a new home. Even as economists state they are beginning to see improvement in the economy, the public has not yet tended to agree, and rising home prices are likely to play a contributing factor in the decline of buyers applying for mortgage loans.

The mortgage rates for this week are still significantly below where they were a year ago, and are considered to be very low when compared to longer-term historical numbers. The low mortgage rates are a positive for the housing industry as buyers lock in their loans at lower rates. Unfortunately, with consumer confidence still not lining up with increasing economist confidence, the rise in rates may mean a dip in sales until confidence increases.

Here’s what the FHA plans to change:

“Spot Approvals”  -  it used to be that the FHA would approve individual condo units for mortgages, without having to approve the entire condominium building/project. Now the whole thing will have to check out before someone can get an FHA-approved loan. The FHA said in a statement that the “processes have been streamlined, eliminating the need to approve units on a ’spot loan’ basis,” but lenders say that this could seriously reduce the available condo choices for buyers.

Maximums on FHA-Loan Holders in a Condo Project - In the past there was no limit, but now the FHA plans to only allow a maximum of 30 percent of condo owners to have the government-backed loans. This means that some buyers, especially those with lower credit scores and smaller down payments, may be kept out of certain condo projects because there are already too many of such homeowners in the building. Again, this will limit available condo options.

Requirements for Sold Units - Although there have been no limitations, the FHA will now require that half of the units in a condo project be sold before it will insure any loans for that building. While this protects the FHA against loss, it creates a catch-22. FHA buyers cannot buy until 50 percent of the project is sold, but it will be hard in many cases for condo builders to sell 50 percent of the units without FHA loan-backing for that first half. This requirement is still more lenient than that of Freddie Mac and Fannie Mae, which require that 70 percent of the project must be sold before they will make loans to new buyers.

Owner-Occupancy Rules - Now only 50 percent of a condo projects’ units must be owner-occupied, instead of the former 51 percent rule. This change doesn’t promise to make a huge difference in the condo market.

Overall, if these new rules go into effect on schedule, they will probably slow the housing market recovery by many months.