Q: I am trying to buy a house. I have a decent credit score of about 660, but the mortgage broker I’m working with says that I will have to pay an extra $2,500 or so in upfront loan charges because my score is below 680. What gives?

Your credit score of 660 easily would have qualified you for a low-rate mortgage when home prices were still soaring a few years ago. But now that values in many areas are slumping and defaults are rising, banks are taking a far more cautious attitude about issuing new loans to borrowers – especially to those who don’t have a top-tier credit rating.

I have received several letters like yours in the past few months as the banking crisis has worsened, so I’m devoting this entire column to answering some of the most common questions about the new guidelines that many lenders have recently adopted.

Q: I can understand why borrowers with very low credit scores must pay higher loan rates or can’t get a mortgage at all. But my credit score is a little above average, so why is the bank demanding that I pay extra money before I can get a loan?

A: There are several reasons why you must come up with more upfront money today in order to get a mortgage.

First and foremost, several studies have shown that the lower a borrower’s credit rating, the greater the chance of that borrower going into default or foreclosure. Banks have known this fact for decades, but were willing to ignore it during the past several years, figuring that they could simply foreclose on the handful of borrowers who might not be able to make their payments, sell the foreclosed property to cover the outstanding balance of the loan – and perhaps even boost their profits because sales values had soared.

Lenders are more cautious today, because the drop in prices in many cities no longer guarantees that they can sell a foreclosed home and get all their money back.

Fannie Mae and Freddie Mac, two quasi-government agencies that help set lending standards, recently adopted rules that require most borrowers with a credit score of less than 680 to pay an additional 1.25 percent of their total loan amount in upfront cash in order to get a loan. The new provision adds $2,500 to the cost of getting a $200,000 mortgage.

Q: We have invested in several homes and condominiums during the past six years without a down payment, and we made lots of money by renting them out and then later reselling them. Now, the bank won’t give us a mortgage to purchase any more rentals. What can we do?

A: Not much. The no-money-down loans that investors like you could obtain easily a few years ago are essentially gone: Figure on making at least a 10 percent or 20 percent down payment if you want to purchase a rental property in this unsteady market.

Many big banks have even scrapped their no-down programs that they offered to buyers who actually planned to live in the property rather than rent it to tenants. Lending giant Wells Fargo, for example, now requires most of its customers to make a minimum 5 percent down payment. And in areas where prices are falling, Wells typically requires at least 10 percent down.

Q: Are banks making it harder for existing homeowners to get home-equity loans or second mortgages, too?

A: Yes – at least, many of them are. Several lenders are now requiring that prospective borrowers have at least a 10 percent or even 20 percent equity stake in their home before they’ll provide a home-equity loan. By doing so, the bank provides itself with an extra financial cushion if prices keep dropping.

Q: There are already at least four homes in my immediate neighborhood that are being offered through foreclosure sales, and they are dragging down the prices of other homes that are being offered by owners who are not behind in their payments. How bad do you think the foreclosure situation will get?

A: It’s hard to say, because Congress and President Bush are still bickering about the best way to provide comprehensive help to borrowers and lenders who are in trouble. But if nothing is done, according to the respected Moody’s Investors Service research firm in Pennsylvania, a staggering 3.5 million homeowners could default on their loans in the next two and a half years.

To put that 3.5-million figure into perspective, it would be the equivalent of every family in Delaware, Hawaii, Idaho, Montana, Nebraska, New Mexico, Wyoming and both Dakotas losing their homes to foreclosure.

Other studies suggest that local home prices drop about 1 percent for each foreclosure in their neighborhood, so lawmakers need to act fast if they want to avoid a complete meltdown in both home values and the banking industry.