When bankruptcy hits home

Refinance: Starting over isn't a trip on easy street for homeowners. It takes time, a rebuilt credit history and a trustworthy lender.

September 26, 1999|By Charles Belfoure | Charles Belfoure,SPECIAL TO THE SUN

William Heckner had refinanced his Carney home once before -- back in 1995 -- to help him get out from under a burden of debt. Toss the credit cards. Make a fresh start. So what if he had to take a 10.5 percent mortgage. You do what you have to do.

He had good intentions, but financial pressures began to rise again. There was his son's tuition at Calvert Hall College high school. His wife -- a nurse -- was going back to school as well and was planning on opening a practice. He didn't adjust his spending habits.

The bills began to pile up again. Out came the credit cards. Five of them. And it didn't take long for him to rack up $65,000 in outstanding balances. That's a lot to pay off when you're only making $12 an hour working at Home Depot.

Maybe refinance again, Heckner thought to himself. Rates had dropped to 7 percent. He could save a couple of hundred dollars off his mortgage and that would help him make a dent in his debt.

But Heckner soon learned that he had so much debt no lender would touch him. What to do?

"I was told from a mortgage broker to go ahead and file bankruptcy," Heckner said, recalling that the broker told him, "It's the best thing for you, you'll wait three months and after three months I will be able to get you a refinance the day after."

It turned out to be the worst advice he got.

Heckner filed for Chapter 7 reorganization in Novem ber. He kept his wife and his house out of the proceedings. In February, he was discharged by the court and he thought he was well on the road to refinancing his home once again.

"The next thing I know is that I am getting stalled, getting the runaround from the one guy," Heckner said. "I went to another person. The other person says, `Well, you have to wait a year.' Great. I go to another person, another finance company, `Well, you have to wait two years.' "

Heckner was drowning in a sea of misinformation.

Getting a second chance

Mortgages and bankruptcies have never been comfortable bedfellows. Does having a bankruptcy ruin an applicant's chances of obtaining a mortgage with favorable terms? Industry professionals say it depends on the lender, what financing program is being offered and the circumstances that caused the bankruptcy.

Take DiAngela and Ahmed Miller. With personal bankruptcies in both of their pasts, they didn't think they could ever buy a house.

But on Aug. 17, they moved into their first home, a single-family house in Randallstown.

More than a year ago, the Millers met with Brian Sachs of Integrity Home Funding in Owings Mills, whose company specializes in helping people one to two years out of bankruptcy get mortgages.

"There's an opportunity for folks who don't think there's any opportunity," Sachs said.

The first step to homeownership for the Millers was not trying to buy a home. "They weren't ready to buy," Sachs said. "I had to customize a plan for them to become `mortgable.' "

Hidden cost of bankruptcy

Sachs organized a program to make them creditworthy that included maintaining a timely rental history, securing a credit card and making monthly on-time payments and attending a homeownership counseling program. After one year, they were ready. The Millers applied for and received a mortgage.

But people who have gone through a bankruptcy in effect must pay a penalty for their bad credit history. There's an element of risk in lending to those with less than perfect credit, and that risk factor translates into a high interest rate such as 9 percent to 11 percent compared with a market rate of 7.75 percent on a conventional 30-year, fixed-rate home mortgage.

Sub-prime lenders don't make these loans out of charity, but despite the high risk they are enormously profitable. The Millers paid three points -- one point equals 1 percent of the loan amount -- to get a reasonable interest rate in the 8 percent range.

"Bankruptcies result from two main causes: financial mismanagement or some catastrophic event," explained Frank Weaver, president of Atlantic Home Equity. "In the overwhelming cases we encounter, it's someone who's over their head in debt because of credit cards."

Then there's bankruptcy or severe credit problems caused by "extenuating circumstances." It's usually a one-time event that is beyond a person's control such as a death in a family, a prolonged illness, or a sudden job layoff.

One of Weaver's customers was a man who had an excellent credit record before his son developed leukemia in 1996. But the heavy medical expenses for his son's treatment put an enormous financial burden on him and, as a result, he couldn't pay his bills. His credit was destroyed.

"His situation was as bad as filing bankruptcy," Weaver said. By mid-1998 though, the father started to reacquire "successful credit management skills" -- the mortgage industry lingo for re-establishing good credit. This year, Weaver's applicant qualified for a home mortgage, but at an interest rate two percentage points higher than what would be charged to someone with perfect credit.

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