For Mortgage Seekers, It's Back to the Basics

An abrupt shift back to the basics of mortgage lending has many house hunters nervous because several once-popular types of loans are disappearing.

With urging from regulators, lenders faced with growing piles of bad loans have clamped down on the kinds of mortgages they are willing to offer. That is most strongly affecting people who lack proof of income, cash reserves or good credit. But others should still be able to find a home loan.

"If all three of these elements are in place, it's basically business as usual," said Greg McBride, senior financial analyst at Bankrate.com. "But, as in any environment, the best way to shop for a mortgage is not just shooting one arrow."

In other words, speak to several lenders and several mortgage brokers, who act as liaisons between lenders and consumers. The Federal Trade Commission advises comparing and negotiating for a mortgage as you would when buying a car.

But first, understand the basics of what it takes to get a mortgage.

For starters, find out if the lender requires a down payment and if so, how much you can afford.

Most house hunters must once again bring money to the table because the no-down-payment loans that four out of 10 first-time home buyers used during the boom years are hard to come by. Many lenders now want at least 5 percent down -- and the more, the better.

Also consider whether you will be required to buy private mortgage insurance, which protects the lender if the borrower fails to pay. If so, ask how much that would add to your monthly payment. PMI is required by most lenders if a loan exceeds 80 percent of a home's value.

To avoid PMI, many cash-strapped borrowers used "piggyback" mortgages in recent years, meaning they took out two loans. The first covered 80 percent of the cost of the home, and the second was typically a home-equity line of credit that covered the balance or at least part of it.

Many lenders have stopped making piggyback loans because the second loan poses more risk than they are willing to take. If a homeowner loses a house, proceeds from its sale would go toward paying off the first mortgage. Usually, there would be little, if any, money left to cover the second.

Also out of favor, and nearly impossible to find, are low- or no-documentation loans, which had been devised for people who were unwilling or unable to verify their incomes.

No matter what type of loan a house hunter has in mind, the one thing most lenders are increasingly focused on is the borrower's credit score, said Patricia Mertz Esswein, an associate editor of Kiplinger's Personal Finance magazine.