$1,400...$2,100...There goes your credit

When the Carters refinanced their home in 2004, they thought it would improve their credit – they were wrong.

John and Nicole Carter had a run of bad luck in 2003 when Nicole was injured at work and had to stay home for 10 months to recover.  During that time they amassed $7,000 in credit card debt to help stay afloat, and there was $1,500 in medical fees that the insurance company refused to pay.  The Carters were disputing those medical charges, but in the meantime they had gone to collections and, combined with the high balances on their credit cards, had dragged their credit scores down. 

Banking on the home equity they had gained during the housing boom of the early 2000’s, and the Carters decided refinance and pay off the credit cards, medical collections, and the remaining $18,000 on their auto loan.

Since their credit was in the low 600’s, they couldn’t qualify for the best interest rates.  Instead, their mortgage broker convinced them to take a loan that was fixed for just two years.  It was enough time to get their credit back on track and it came with a low $1,400 payment, much lower than the sum of their old mortgage and individual credit payments combined.

Fast forward a couple of years, and the Carters, like so many other home owners, are struggling to keep their heads above water.  They had paid off their collections, but the broker hadn’t mentioned that they will still remain on the Carter’s credit reports for 7 years.  And while their credit cards had been paid off, problems with Nicole’s health had forced them to max out their credit again.

To make things worse, their loan payment just adjusted from $1,400 to $1,900.  As the housing market boomed, refinancing or selling your home was a simple solution for borrowers who had trouble making the mortgage payment.  Now that the housing market has stalled, subprime borrowers are stuck with loans they really couldn’t afford in the first place.

The higher payment has pushed them behind on their bills again, so John started taking extra shifts at the department store where he is an assistant manager.  But not in time to stay current on their mortgage; in March, the Carters paid late.  Now their April payment is due, and the latest adjustment has pushed their payment to over $2,100. 

After the first adjustment, John called their lender and tried to see if they could work something out.  With home values stagnant in his area, and the lender tightening their guidelines, the refinance they were counting on since 2004 was no longer available to them, so he kept searching.  With the recent crisis in the subprime mortgage industry, it has made it even more difficult to find a lender to give them a loan.

In the meantime, late payments are mounting on their credit, and some accounts are in danger of being charged off by the credit grantor.  What started as an earnest attempt to improve their credit has actually done the opposite and reduced their credit scores to the low 500’s. 

So the Carters, unable to refinance or sell their home in time, are considering the unthinkable; letting their home go into foreclosure. 

“We can’t imagine losing our home,” says Nicole.  “But with our credit already a wreck, and the loan payment going up, we don’t see any other option.”