You may think that waiting to buy a home until prices drop even further will save you a bundle. Yet even if you time the market correctly, you may find that your friendly neighborhood bank has closed the vault on mortgage lending, leaving you out in the cold.

After dealing with everything from falling prices to homebuilder woes and the subprime lending crisis, the housing market suffered another blow to its health yesterday. The Federal Reserve released its quarterly survey on bank lending practices, in which senior loan officers from the largest U.S. and foreign banks give their opinions of the state of commercial lending within the banking system.

Prime vs. subprime
The Fed survey tells a tale of two markets for mortgage lending. On one hand, banks remained relatively open to so-called "prime" borrowers, who have the highest credit quality. The majority of institutions held lending standards unchanged for prime borrowers, with only 15% reporting having tightened lending practices.

In the subprime and alternative lending markets, however, conditions have changed dramatically. About half of the financial institutions surveyed said that they had tightened lending standards for less credit-worthy borrowers, who must generally pay higher interest rates or use non-traditional mortgages in order to obtain affordable mortgage financing. A substantial number of banks, including nearly a third of banks lending to subprime borrowers, reported having tightened their standards considerably.

Lack of interest
Perhaps more alarming from an overall perspective is the slackening level of activity in mortgage financing. Almost a third of the banks stated that demand for mortgages was lower than normal. The answers were consistent at every level of the market, including prime and subprime borrowers. That's not just bad news for large lenders like Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) and homebuilder stocks like D.R. Horton (NYSE:DHI) and Centex (NYSE:CTX). It also spells trouble for any business within the long reach of the housing slump, such as home-improvement chains Lowe's (NYSE:LOW) and Home Depot (NYSE:HD).

It's still too early to tell what effect this will have on the overall housing market, but the signs aren't good. More than halfway through the traditionally busy spring season, dropping prices and low mortgage rates should logically be stimulating demand. Yet even the National Association of Realtors has reined in its forecasts in light of tightening credit standards. Predictions now call for a drop of 1% in median existing home prices, with the number of sales falling by about 3%.

What to do
If you're thinking about buying a home, do your homework. Find a lender or mortgage broker early in the process, and get preapproved for a mortgage that will work for you. By doing this before you get deep into the negotiating process on a particular home, you can avoid any unpleasant surprises regarding your financing. Furthermore, once you've gotten preapproval for a loan, your lender will probably think twice before revising its standards to exclude you, even if it takes you a while to settle on a particular home.

You'll find helpful information on your financing options in our Home Center. If you want more specific guidance about your own particular housing situation, take a closer look at our personal finance service, Motley Fool Green Light. A 30-day free trial gives you access to our Home Matters area, which features articles on running the numbers on your mortgage, deciding on the right neighborhood for your family, and much more. Take a step toward your dream home today with no obligation.

Fool contributor Dan Caplinger hopes not to be in the housing market for a long while. He doesn't own shares of the companies mentioned in this article. Home Depot is an Inside Value recommendation. The Fool's disclosure policy is like a roof over your head.