With mortgage rates low and houses sadly overabundant, now seems like the perfect time to buy a home. Unfortunately, many would-be buyers now find they can't get a mortgage in the first place -- and their odds of success could soon grow even longer.

Oh, NOW you get stringent!
According to the Federal Reserve, almost a quarter of all loan applicants are now rejected. At the National Association of Realtors, chief economist Lawrence Yun warns, "Good borrowers with one or two blemishes on their credit are being denied credit."

Recent reforms and painful losses have made once-lenient lenders immensely pickier about who they lend to. The average credit score for those securing FHA loans has risen from 660 to 700 over a few years. Whereas lenders used to find a way to lend to those with scores below 620, most of those people now get turned away.

Remember just a few years ago, when you could borrow almost the entire value of your new home, and when you sometimes didn't even have to provide documentation of your income? A CNNMoney.com article notes that the median down payment for a house now approaches 15%, up from close to zero.

Bad loans shrinking
Banks, which often now require 20% down, are working to get their previous bad loans off their books. E*TRADE Financial (Nasdaq: ETFC), which offers banking services as well as brokerage services, boasts in a recent report that it has lowered its delinquencies by 26% over the past year, and 52% from its 2007 peak. SunTrust (NYSE: STI), in its 2010 report, notes an improvement in its credit quality while reducing its provision for credit losses by 47% over the past year. At the end of 2010, US Bancorp (NYSE: USB) observed its fifth consecutive quarter of declining provisions for credit losses. Wells Fargo (NYSE: WFC) has even come out in favor of 30% down payments!

Stronger banks may be great news for shareholders, but they're putting up roadblocks for would-be homebuyers. Alas, if they drive buyers out of the market, any additional slowdown in housing purchases could further sandbag the economy.

In addition, the Dodd-Frank reforms now require banks to have some "skin in the game," by keeping 5% of many mortgages, such as those with less than 20% down, on their own books. (Previously, banks would often "securitize" mortgages, packaging and selling them entirely to outside investors.) Now, if the loans they make go bad, banks will feel more pain, which further motivates them to seek high-quality borrowers.

All is not lost
To land a mortgage now, be strategic. Start building up your credit score. Stockpile more money for a down payment, and keep it in safer short-term investments such as CDs, instead of the more volatile stock market. You may need to delay your purchase for bit, but if you must rent for a while, look at the bright side -- you'll save a lot on property taxes, insurance, and other home-related expenses.

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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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