Banks and other mortgage lenders have reverted to the conservative practices of more than a decade ago, and borrowers are settling into a new norm, where even squeaky-clean credit and hefty down payments are not always enough to qualify for a loan.
A borrower's assets, employment history, debt management and supporting documents must also be rock-solid for a loan approval, and lenders are not shy about saying no.
Nearly a third of mortgage applications for home purchases were rejected during the first half of 2010, the most recent period for which data are available from the Mortgage Bankers Association.
To qualify for a conventional loan, borrowers now typically need credit scores in the mid-600s, a 20 percent down payment, two years of steady employment and a monthly debt-to-income ratio of no more than 42 percent, mortgage payment included, according to Realtor and lender Sweth Chandramouli of Ethical Homes, a mortgage and real estate firm.
"Any assets must be in your account two months before the underwriter verifies them or they will make you prove where the cash came from," he said. Lenders want to make sure the money is not an undisclosed loan from a relative who expects to be repaid.
Except for the down payment, Federal Housing Administration loans have similar requirements. Although minimum credit scores for FHA loans with at least 3.5 percent down were recently reduced from 620 to 580, many lenders have overlays that drive the requirements back up into the 600s.
Whether it's a conventional or FHA loan, "the two years of employment is hardest to get around," Chandramouli said, although lenders often make an exception for recent college graduates.
Everyone else, however, must account for any employment gaps of a month or more, and lenders do not want to see people change professional fields during those two years.
"It can be different employers, but the key is the same line of employment," said Allyson Knudsen, senior vice president for retail underwriting and administration at Wells Fargo.
For people who are employed but do not earn a set salary -- like consultants, the self-employed or anyone working on commission -- lenders accept tax returns as proof of income and average the earnings over two years, said Fred Bowers, vice president of Intercoastal Mortgage Co., which provides residential financing throughout the Washington region.
The same standards apply for people who lost their job and were later re-employed. Some banks may make allowances for damaged credit because of a job loss, but Knudsen said: "We would have to establish that it wasn't financial mismanagement." And that can be difficult to prove.
Foreclosures do more lasting damage. Conventional lenders will not consider a foreclosed borrower for at least five years, and that is assuming the person meets all other requirements for employment and credit.
The same time frame also applies to foreclosed borrowers of FHA loans who try to qualify for another FHA loan. Foreclosed homeowners can get an FHA loan in as little as three years if the foreclosed home was financed with a conventional loan, Bowers said.
Borrowers may be able to qualify for a mortgage after a short sale in as little as two years.
"Short sales are a whole other ballgame because, depending on the state where it took place and the terms of the sale, lenders can still come after you several years later to recover the difference," Bowers said.
Foreclosures and short sales also can remain on a credit report for seven to 10 years, with borrowers typically facing tougher restrictions for mortgages than other applicants while paying more for the loan.