Despite legislative efforts to ease the home-loan credit crunch, mortgage professionals say the lending environment is extremely tight, regardless of credit scores. It shows no signs of loosening, given how lenders and loan investors now fear getting burned.

"Confidence needs to be restored to the market (before lending will ease)," said Lehman Bros. economist Michelle Meyer. She says banks lack confidence that prices will stabilize and foreclosures will abate. So do their Wall Street backers, who now hold a lot of worthless mortgage securities.

An April Federal Reserve survey found that nearly two-thirds of banks had tightened lending standards on traditional home mortgages, and 15% considerably.

The credit crunch is hitting borrowers in myriad ways. But mortgage brokers say a few things are causing particular consternation.

Five Prickly Points

Troublesome developments include: very tight lending practices for the self-employed and borrowers with investment income; dried-up second mortgage and equity lending; higher down payment requirements; condo loan restrictions; and tough guidelines for vacation and investment property lending.

The self-employed and those with investment income are finding this lending marketplace particularly unfriendly. Gone are the days of "no-document" loans, which came to be called "liar" loans due to abuses.

Borrowers qualified for no-document loans using "stated income," declaring their income but not supplying corroborating papers. This option was popular with business owners, who can, for tax purposes, look cash-poor but actually be doing fine and have good credit.

"All we can use (to do such a loan qualification) is the money borrowers claim they make and don't write off," said Grant Eshback, president of Open Home Mortgage in Duluth, Ga. "If you look cash-poor on a tax form, that hurts you with a lender."

Those who do provide documentation of income now find it scrutinized. Lenders don't simply accept a copy of a borrower's tax return -- "they're cross-referencing 1040s with the IRS," said loan broker Pat Townsley of California Mortgage Advisors in San Rafael, Calif.

But a borrower who is financially secure, with investment income, is a desirable loan applicant, right? No. A McDonald's paycheck can be more highly valued by lenders. Because of the ups and downs of investments, lenders discount investment income by 25% to 30%.

Equity Pool Drained

Meanwhile, lenders have been running from the home equity and line-of-credit markets, where leads were often generated through outside brokers. JPMorgan Chase (NYSE:JPM - News) has said it won't do such loans via third-party brokers any more.

Townsley says equity loans have become scarce, their underwriting left mostly to local banks. He says that some homeowners with existing lines of credit have had their credit capped, even if they haven't reached the original limit.

Still, borrowers need to stop viewing homes as ATMs, Eshback says.

"You can't pull out 100% of your equity anymore, which is a good thing," he said. "For too long, people have been pulling all the equity out of their homes. It has really ruined some people's lives and marriages."

Condo lending restrictions aren't new, but condo loans are being highly scrutinized by both banks and mortgage insurers, say mortgage brokers. Condo homeowner associations must have 10% of project operating budgets held in reserve, for capital expenditures and deferred maintenance, in order for prospective condo buyers to get a mortgage. And lenders want condo complexes to be at least 50% owner-occupied.

Condos Cramped

Mortgage insurers can have their own requirements, though. AIG United Guaranty says it will no longer insure mortgages for condos in "declining markets." And it requires that no more than 30% of units in a condo complex be rentals.

Insurers also are calling the shots on down payment requirements for some loans. Overall, borrowers are being asked to contribute larger down payments. Eshback says some lenders will still do 95% or 100% loans, only to have the loan package rejected by the mortgage insurer.

"I've got a lot of people right now that I could qualify at 95%, but those loans don't exist," said Pete Wilkinson, owner of Deschutes Mortgage Group, in Bend, Ore. "The property values are decreasing so why would you loan 95% on something that's going down in value?"

Those buying a vacation or investment property will need to put in considerably more. A purchase in an expensive area, using a jumbo conforming loan from Freddie Mac or Fannie Mae, will require 40% down for a second home or rental.

Is the tough lender environment worth navigating, given the housing downturn? It's an individual decision. But in the long run, "there are going to be some amazing deals," said broker Ron Henderson, president of Multi Real Estate Services in West Hills, Calif.