Trouble Getting Mortgage
by Gary Foreman
Dear Dollar Stretcher,
Several years ago I was told that I would have to file for bankruptcy. I did see an attorney and he suggested I wait until after I got divorced. I told my creditors that I was planning to file for bankruptcy after my divorce. I was not happy with the attorney during my divorce and never filed for bankruptcy. It has been almost five years now and my debt has been written off and no creditors are bothering me. I'm trying to get my life back in order but I'm still struggling. I need a place to live. With rents so high I could pay a mortgage on a small condo for the same amount. This is what I would like to do but I have the debt issues hanging over my head. I'm a 46 year old single parent raising two elementary school age children. I feel like I'm going to end up living my old age in a cardboard box. I also feel like my life is in limbo and there's no way out. Can you offer any advice?
It sure would be nice to tell Sally that there's an easy solution for her problem. But unless she has a wealthy friend or relative willing to step in she'll need to have patience, expend some effort and be willing to make some hard decisions.
Only time will clear Sally's credit history. Generally negative information will remain on your report for seven years. Or 10 years for a bankruptcy. There's no legitimate way to erase truthful information quickly from her history. Being careful to meet her current payments will help improve her score over time.
But, Sally may still be able to get a mortgage if her credit score is in the low 600 point range. She can expect to pay a higher interest rate. A sizeable down payment will make finding a mortgage easier. In Sally's case that might not be possible. The only way to find a mortgage company willing to work with her is to search for them. That means making phone calls and telling her story.
Sally needs to be careful in applying for a mortgage. If a large number of potential lenders check her credit history that will make it look like no one is willing to lend her money. She can avoid that problem by explaining her situation before they check her history. Some will turn her down right away. They would have refused her anyway. At least now they haven't lowered her credit score.
One way to find the best potential lenders is to work with a mortgage broker. They should be familiar with the institutions that are most likely to work with Sally. Again, she needs to be up front with the broker about her past. Also make sure that he's going to limit access her credit file.
Other options could work for Sally. The first is renting with an option to buy. A landlord/seller will still want to know about Sally's finances. But, typically they won't be quite as critical as a regular mortgage company. It would also allow her to continue to rent while she's trying to find a mortgage.
Another option would be to find a condo being sold by someone who's willing to take back the mortgage. Sally is right about condo prices. In many places condos are relatively inexpensive. That also means that she's more likely to find a seller who has had trouble selling. It might be enough to get one to finance the deal for Sally.
One other possibility would be to see if there are any assistance programs that could help her. Habitat for Humanity is one. There are others. Most are run locally so she'll need to speak with her community social service agencies and churches to find them.
Just finding a home and qualifying for the mortgage isn't the only thing that Sally needs to watch. She must be careful to only spend what she can afford.
Between food, auto, medical and insurance Sally will probably have close to 50% of her after-tax income committed. So if she spends an additional 30% on housing that only leaves 20% for clothing, entertainment, savings, debt reduction, after-school programs, unexpected emergencies and savings.
Others may tell Sally that she can afford to spend more. She should ignore them. They won't be the ones sweating the mortgage payment each month.
There are ways for Sally to reduce her housing costs. One would be to share a house or a larger apartment. In many places it's difficult to provide for a family on one income. It's harder still if there's only one parent because they're too busy to do some of the time consuming things that can save money.
Taking in a roommate could help solve that problem. Two single moms could blend a family and both would be better off financially. With two adults to share cooking, cleaning and other household chores Sally would also have a little more time to enjoy her children.
Naturally Sally would need to be very careful in finding the right person. They will influence her children at an impressionable age. So she'll want to know the person well before anyone starts packing and moving their belongings.
Sally's past will make her future more difficult. Hopefully she'll find the right combination to allow her to build some equity and keep her housing expenses in line with her income.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.
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