Credit Problems Delay Family’s Dream

Homeownership was a mere two weeks away for Angelo and Kathy Bell and their two daughters when their lender--whom they had found through the Internet--backed out.

The reason? Bad credit.

Angelo and Kathy had a string of late payments, some accounts that had gone into collection and a car repossessed in 1998. Now all of that would have to be cleaned up, including payment of the $7,000 debt on the car to a financing company, before they could be approved by the lender.

“Our [loan] has been denied,” said Angelo, 37, an information technology manager, halting what was to be a 38-day escrow on a $179,990 home in Moreno Valley. Kathy’s dream of moving out of their 880-square-foot Miracle Mile apartment into a 1,734-square-foot home with generous closet space is now on hold.

And Angelo’s desire to provide a spacious home for Kathy and daughters Israel, 2, and Cimone, 15 months--complete with a family room, a den and a formal dining room so they could host Christmas for the extended family this year--will have to wait.

“We’re going to have to regroup,” Angelo said, “and try and look at this from a new perspective.”

The Bells are still reeling from a time shortly after they were married in 1996 when they both lost their jobs. Consequently, after Angelo’s severance pay ran out, bills went unpaid and debts started to add up.

Around this time, their 1992 Mercury Sable was repossessed. A few months later, even after they both got on their feet, Kathy, who was pregnant with their first child, was in a car accident that resulted in bed rest and her going on disability. Again, the budget was tight, as the couple lost Kathy’s $28,000 annual salary.

“We didn’t have a plan,” Angelo said. “We would think about savings, but then something would always come up.”

But in the last few years, as the Bells have apartment-hopped to find more space for their growing family, they have made attempts to restore their credit--hoping they could clean it up enough to trade in apartment living for homeownership.

About 1 1/2 years ago, Angelo started tackling the old debt--one bill at a time. He started sending out letters--more than a dozen--to agencies asking for time to repay old bills. In fact, the couple thought they were starting to make financial progress--so much so that they decided to live on Angelo’s $61,000 annual gross income and have Kathy stay at home with the kids.

They even managed to save $6,000--money they had hoped could be used toward a down payment on a home. Finally, they thought they were emotionally and financially ready for homeownership.

Through savvy use of the Internet, the Bells explored different neighborhoods in the Greater Los Angeles area and learned they could afford their dream home in Moreno Valley--even though it would mean up to three hours of daily commuting for Angelo, whose job is in Marina del Rey.

They also found a real estate agent online, and soon the couple--with a letter of conditional approval from a lender--were touring houses.

They found one they loved, made an offer and, on one giddy Friday afternoon, learned they had gotten the house.

But 2 1/2 weeks into escrow, and after further review, the lender backed out, saying that the Bells would be too much of a risk.

Now the Bells must find a way to clean up their credit report--including some items they are disputing and say should be removed--and repay the $7,000 debt on the car, which could set the couple back months or more. And they will certainly lose the house they loved. But all is not lost for the Bells.

“There is hope for Angelo and Kathy,” according to Jennifer Livingston, a 22-year expert in the mortgage banking business and vice president and regional sales manager of Union Bank of California. But, she added, homeownership may take time. “If [they] dream of owning a home,” she said, “then the patience will really be worth it.”

Although a quick fix for the Bells might be to continue searching out a lender willing to make them a loan, Livingston recommended against that.

“There is someone out there today that would be willing to make them a loan,” but at a cost, she said. Consumers who are considered higher risk to lenders have to make up that deficit with a loan that is not very attractive, she said.

Loans such as these, according to Livingston, can be offered at much higher interest rates, require more points for closing and may have to be refinanced in a few years. Other options offer manageable adjustable rates to start, and then may jump as much as three percentage points a year, quickly becoming a financial hardship.

“For someone who is just trying to buy a new home, this is an exorbitant way to do so,” Livingston said. “These types of loans will certainly drain any savings the Bells have had” and make purchasing necessities like carpeting, furniture or appliances nearly impossible, she said.

Instead, Livingston recommended the Bells continue to improve their credit history, paying off debt as they can. In the meantime, she said, they must remain current for two years on their bills--meaning they can never miss or be late on any payments.

She also suggested they put some money into savings, even if it is nominal. “It’s these little steps that take time,” she said.

She recommended the Bells continue to monitor their credit report. The couple has discovered that some debt can inadvertently show up twice, and that items--once paid--can be very slow in coming off.

“[Collection] agencies are not too speedy to report [debt payments] to credit bureaus,” she said.

After the rejection, the Bells may have felt alone with their debt problem, but experts say they are not alone. According to Dianne Wilkman, president and chief executive officer of Springboard, a nonprofit consumer credit-counseling service in Southern California, a bad credit history is the No. 1 reason applicants are denied home loans in the Greater Los Angeles area.

In fact, Wilkman estimates that about a quarter of local applicants vying for a conventional home loan are denied due to bad credit.

“Overconsumption is a factor,” she said, “but so are other reasons like divorce, medical issues and a lack of health insurance ... [and] the cost of living in Southern California is so high, that puts a strain on family budgets.”

Wilkman said people may start to charge unpaid bills to their credit cards just to make ends meet, adding to their debt.

Wilkman recommended the Bells consider counseling with Springboard, which has 35 walk-in locations in Southern California.

“We can’t wave a wand and turn bad credit into A credit,” she said, “but we ... give people the tools to get back in control.”

Now the Bells are trying to get over losing the house they loved. “Next time around,” Angelo said, “we’ll know more of what we’re doing. We’ll be ready for this.”

But there may be an additional benefit for the Bells, especially in today’s record-breaking seller’s market. “They can get their credit cleaned up,” said Livingston of Union Bank, “while they wait for home prices to stabilize.”

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(BEGIN TEXT OF INFOBOX)

This Month’s Home-Buyer Make-Over

Home buyers: Angelo, 37, and Kathy Bell, 29.

Occupations: Angelo is a manager of information technology for a public relations company; Kathy is a stay-at-home mother.

Gross annual income: $61,000.

Goal: To buy a first home with the feel of a big family home--even though it may mean relocating to the Inland Empire, far from Angelo’s Marina del Rey workplace.

The problem: While Angelo and Kathy have worked hard over the last 1 1/2 years to clean up some bad credit, their credit score is still poor and an auto repossession is still outstanding, making it difficult to get a loan. The Bells have already found the house of their dreams in Moreno Valley, which they likely will not be able to buy.

Recommendations

* Stay away from loans with extremely high interest rates, points or quick payback schedules even if it means they can get into the home now.

* Contact the three main credit bureaus (TransUnion, Equifax and Experian) to receive a complete, up-to-date credit report and slowly start tackling each item on the report. Contact the creditor directly to set up a payment plan or to pay off each debt one at a time.

* Carefully scrutinize the credit report to make sure that some collections haven’t been listed twice and to ensure paid accounts have been removed.

* Repay any repossessions--or negotiate to pay a percent of the amount owed--to have that removed from the credit report or corrected to reflect that it has been paid.

* Maintain perfect current credit (meaning no late payments or collections) for at least 24 months before applying for a loan.

* While whittling down debt, put something into savings--even if it is a few hundred dollars a month.

* Most items stay on a credit report for seven years, but negotiate to have the items removed sooner, in some cases, once they are paid.

* Consider financial counseling from an organization such as Springboard, a nonprofit offering services from debt management strategies to pre- and post-homeownership counseling. Counseling is free, with some specialized services for a nominal fee. Help is available on the Web, www.credit.org, or call (888) 462-2227.

Meet the Experts

Jennifer Livingston has been in the mortgage banking business for 22 years. She is currently vice president and regional sales manager for Union Bank of California and manages the Southern California region. Dianne Wilkman is the president and chief executive officer of Springboard, after spending most of her earlier career in commercial banking.

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Allison B. Cohen is a Los Angeles freelance writer.