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Buying a Home During the Storm

Lately, it seems as though every few days brings another mortgage-related market blowup. The latest one -- as I write this, anyway -- concerns Countrywide Financial (NYSE: CFC  ) , whose shares were down hard Thursday morning on news that the company drew down its entire credit line -- and after a Merrill Lynch analyst's report suggested that the company could be headed for bankruptcy.

Countrywide's troubles are the latest in a string of crises for mortgage lenders, and for institutions such as Bear Stearns (NYSE: BSC  ) and Goldman Sachs (NYSE: GS  ) that have taken huge losses after buying the lenders' mortgage-backed securities. The problem is fairly straightforward. Many lenders have built their business models on making loans, packaging those loans and turning them into securities, selling those securities to institutional investors like hedge funds and mutual funds, taking the money from the sales and making new loans, and repeating the process.

Now, after stagnating housing prices have led to increased rates of mortgage defaults (especially, but not entirely, among subprime loans) and huge losses for investors, the market for those securities has dried up. This situation has forced lenders to scramble for liquidity -- money to continue operating -- and that scramble has led to some well-publicized bankruptcies.

So what does this all mean for those of us who are looking to buy a house in the near future?

I'm glad you asked.

If you're looking to buy
Let's make something clear up front: Many lenders are definitely still lending. Mortgages are still widely available. Houses are still being bought and sold. If you have decent credit and proof of a steady income, aren't asking for anything wildly beyond your means, and have a 5% down payment saved up, you'll probably be fine.

I say "probably" not because you'll have trouble getting a loan, but because those bankruptcies have left a few buyers in the lurch. In some cases, people who thought they had an approved loan suddenly found out a few days -- or hours -- before their closing that they wouldn't be getting the loan after all. For loans through lenders such as Accredited Home Lenders (Nasdaq: LEND  ) and Impac Mortgage (NYSE: IMH  ) , which have been feeling the squeeze in the subprime crisis, it's always possible that by the time you close, something will have happened to jeopardize your loan.

But if this happens to you, don't panic: Generally, you'll be able to work with your loan officer to get the loan transferred to another institution, with only a small delay and a bit of added hassle.

When things aren't that simple
If you don't have great credit, proof of a steady income, or a down payment, things get a little more complicated. Generally speaking, standards are tightening all across the board, especially for loans that fall outside the great-credit-30-year-fixed-conforming envelope, and the days where you could get a mortgage with little more than a phone call are gone.

While you can still get a no-down-payment loan, expect to be asked to show hard proof of employment income and of substantial savings or other liquid assets, as well as a strong credit history. Freelancers (like yours truly) and others who don't have W-2s to show will have a tougher time, as will people with a few dings on their credit report.

Credit matters
And, of course, if your credit is checkered -- if your FICO score is below 620 or so -- your options have become much more limited for the moment. But you do still have options. There are still subprime mortgages available, but not as many, and rates have jumped somewhat.

Essentially, what's going on is that the mortgage industry -- along with Wall Street -- is rethinking the appropriate pricing for taking on the risk of a borrower with a less-than-prime credit history. While it's a safe bet that the industry will come to a new consensus before too long, and the range of products offered to subprime borrowers will expand, lenders are being very conservative right now, for obvious reasons.

The best advice I can give in the current mortgage market is pretty simple: Whether you're seeking a basic conforming 30-year fixed mortgage, a subprime loan, or a non-standard loan like a "jumbo" mortgage or a no-down-payment arrangement, research your options carefully and talk to lenders before you go house-shopping. There are still lots of mortgages available, but the ground is constantly shifting, and it's best to have your expectations firmly grounded before you go and search out the home of your dreams.

For more on how to get the best loan you can -- regardless of your financial circumstances -- take a look at our Home Center.

Fool contributor John Rosevear does not own any of the stocks mentioned above. The Motley Fool has a disclosure policy.

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