Brenda and Ron had fallen on some bad times financially. Brenda had lost her job of 20 years due to a company merger. She did receive a good severance package but her job hunt had been fruitless and she and Ron had filed for bankruptcy. They owned a home that they paid $100,000 for three years ago. With the booming housing market it was now worth $190,000! They knew it was a great time to sell and take the profit and upgrade to a bigger home. When they filed bankruptcy two years ago, they were lax about their bills and made late payments constantly. They figured their credit was messed up anyway so it didn’t matter. Wrong. They found out later on that this only made their credit score take an even lower dive. A friend told them that they could probably still get a mortgage if they put a large down payment on a home. They contacted a lender and did get pre-qualified. The problem was the rate was 9.75% (adjustable with a cap of 14%). Their current rate on their home was 7%! With rates so low it seemed outrageous.

They decided to check the classifieds for “owner financing” homes. In the 3 pages of ads there were only 4 available. Once they called all four ads, they found that one home was not in the area they wanted to live in, and one was smaller than their current home. They made appointments to see the other two. They were somewhat interested in one of the homes. It was not exactly what they wanted to upgrade to, but they felt trapped because of their credit situation. The seller explained to them the financing. The payment was a comfortable payment but it was interest only payments for 3 years. This would mean that the $275,000 purchase price would be the same amount still owed after three years of payments! At that time the whole mortgage amount would become due. He explained that this was called a “balloon payment” and they would have to come up with the $275,000 in full or lose the house back to him. In other words the best way would be for them to go get a mortgage at that time and purchase the house. Ron and Brenda decided that this was not the way to go. They were not really crazy about the house and were just settling for something. The more they thought about the higher interest rate the more it would make sense. They would pay more of a mortgage payment because of the higher rate but would be able to buy a house that they really wanted. Even if after two years they paid an extra $5,000 in payments because of this, it was still worth it to not miss out on the huge profit they could make now. Needless to say, they went back to the lender and accepted the higher rate. The lender did inform them that if they paid their bills on time every month for the next two years, their credit scores would improve markedly. Brenda and Ron feel that “in this day and age we are not people, but just credit scores. We are at the mercy of the lender.”

By sharing their story they hope this will help others realize that it is still possible to buy a house even if you file bankruptcy. You don’t have to wait 7 years! They also realized that sometimes it is not worth getting so focused on an interest rate. Sometimes the difference in monthly payments is really minimal in the long run.