Home loan lending used to be relatively simple. Lenders were so hungry for business they readily accepted no-down mortgages, interest-only loans, and E-Z refinancing for borrowers with bruised credit. Recently, however, a wave of bad loans wiped out small independent mortgage brokers, devastated bad-credit lenders, and prompted the industry itself to tighten lending practices.

Today, it has become harder than ever for cash-strapped would-be homeowners to obtain home loan lending.

Who Is To Blame?
Experts blame subprime lenders for the recent home loan lending debacle. In the past, people with poor credit scores or large debts and modest incomes would not have been granted a loan. In recent years, however, a new breed of mortgage brokers - called subprime lenders - burst onto the market. Instead of denying loans to people with poor credit history, they let these people take out mortgages and then charge them higher interest rates to offset the high risks associated with the loans.

Such action on the subprime home loan lending front enabled a huge part of the population to own houses. Subprime home loan lending morphed dramatically from a start-up business into a $600-billion-a-year enterprise. The problem with high risks, however, is that they either pay off magnificently or go bust, and this is just what happened. The subprime market fell, and it was not long before homeowners who financed their purchase with subprime loans found themselves with foreclosure notices in their hands.

Stringent Loan Standards
When applying for home loan lending, expect more than run-of-the-mill scrutiny. The industry is cracking down on the so-called "liar loans." These are mortgages obtained without verification of the buyer's declared income, under a "stated income loan" or "no documentation loan."

Additionally, the home loan lending industry has become more conservative in attaching value to houses. Before, bankers generously appraised homes for so much more than they're worth. Today, the appraisal is based not on the recent market value of similar homes but on worst-case scenario market pricing. Worst-case scenario value is not the amount a house can be sold for, but the amount it will fetch once it goes into foreclosure.

The Silver Lining
That home loan lending implements stricter regulations is sure to dismay everyone, from borrowers to lenders . However, three good things can come out of this. First, inexperienced and even fly-by-night mortgage brokers will be driven out of business, leaving the home loan lending market to legitimate lenders. Second, with lenders no longer eager to grant high-risk loans, there will be more money and better rates for borrowers with sufficient downpayment and good credit. Finally, fewer high-risk loans that never should have been granted in the first place will be floated into the market. This will result in fewer homeowners being dismayed and losing their homes due to inability to meet payments.

Every story has a moral, and this article contains only one. If something sounds too good to be true, it probably is too good to be true. So when buying a house, do not be tempted to take shortcuts. Go the longer but perfectly legitimate and business-sound home loan lending route.

By : Rony Walker