With proper steps, buyers are still able to secure loans

Flummoxed by the foreclosure mess in the housing market, lenders have returned to the ABCs of lending when judging potential borrowers, according to Greg McBride, senior financial analyst with Bankrate.com.

"They are once again looking for three basic ingredients when determining whether or not to make a loan: good credit, money for a down payment and proof of income," McBride explains.

"Those things had fallen by the wayside during the housing boom when the only requirement to get a loan was that you have a pulse," he says.

The risky, foolhardy lending that was prevalent during 2004, 2005 and 2006 happened as a result of all of the interest rate cuts made by the Federal Reserve between 2001 and 2003, McBride believes.

"Investors, desperate for yield, decided to take on more risk. So they invested in mortgages given to people with spottier credit," he says.

"Eager investors were lined up out the door to purchase these loans, so banks kept making them. That is why the subprime mortgage market grew so fast.

"Everyone in the chain was making money and, to be honest, if the lender says 'no' to a loan, no one in the chain gets paid. So there was no incentive for a lender to turn down a loan. They didn't have to back it, after all. They were selling it to investors."

But when interest rates started to rise, these homeowners with questionable credit saw huge increases in their adjustable rate mortgages.

Add to the fact that home price appreciation had come to a screeching halt and you found people who could not make their increased mortgage payments on houses that were no longer worth what they borrowed to purchase them. Foreclosure often followed.

What is the state of the mortgage business today?

"The pendulum has swung from the days of very easy credit to much tighter requirements," McBride says. "The investor demand for higher yield, riskier debt has disappeared and lenders are now looking for squeaky clean borrowers."

Is it difficult for a qualified buyer to get a mortgage today?

"The definition of 'qualified' has changed. If you have good credit, money for a down payment and proof of income, you are in good shape for getting a mortgage."

But keep in mind, he says, that the higher your credit score, the better the interest rates you can get and the fewer strings lenders will attach to the loan.

The only exception to that, according to McBride, is someone trying to get a jumbo mortgage (a mortgage of more than $417,000 or of more than 175 percent of the median house price in a given area). That is still difficult because loans of that size do not carry government loan guarantees and lenders are reluctant to make them.

What do you suggest that someone attempting to get a mortgage do to make themselves more attractive to a lender?

"Two to three months before you are ready to get into the market, pull your credit report and fix any errors you find there," McBride says.

"And to prove that you are in for the long haul and prepared for the commitment, take some time to boost the amount in your savings account, pay down your debts and improve your credit scores."

What changes have been made in mortgage lending procedures to prevent future difficulties like the current rash of foreclosures?

"We are returning to the way things used to be. Exotic mortgage products are back to being niche products only," he says. "Making them mainstream products was a recipe for problems."

Now qualification for a mortgage is based on multiple appraisals, income and debt ratios and whether a buyer can afford to make the highest payments a mortgage can potentially rise to, not only the low introductory interest rates, McBride says.

Are these changes good for consumers and the marketplace?

"There was lots of greed out there and people forget that," McBride says. "People saw real estate as their ticket to Easy Street."

As a result, lots of bad loans were made and prices went up too fast.

"None of that was sustainable, so the process we are going through now is painful, but necessary."

What do you see in the future of the mortgage industry?

"Today's overly restrictive credit environment will loosen in a few years. But we won't go back to the Wild West attitude of the last few years. It will settle somewhere in the middle."