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Room for One More

With plans to become a foster parent, a renter on a tight budget searches for a two-bedroom home. She overcomes the first hurdle: Qualifying for a loan despite a bankruptcy in her past.

April 21, 2002|ALLISON B. COHEN | SPECIAL TO THE TIMES

Elizabeth Paul would be perfectly content living another 10 years in her one-bedroom, 850-square-foot rental near Beverlywood in Los Angeles. But the 39-year-old teacher--a self-described pack rat--is running out of space, but not because of her four cats or the piles of books overflowing her living room bookshelves and window sills. She's planning to become a foster parent.

"You need to have a two-bedroom place if you're going to have a kid," she said.

Yet homeownership seems unattainable to Paul, who grosses about $45,000 a year teaching English and English as a Second Language at Palms Middle School in Los Angeles. Not only is her income limited, but Paul has only $5,000 in savings, and she once filed for bankruptcy--the only blemish on her otherwise perfect credit history.

"The whole thing seems very bleak," she said.

But having been accepted as a foster parent has motivated Paul to try to get into the housing market, especially now that interest rates have made it less of a stretch to move from paying rent to a mortgage.

"I was looking for a larger apartment last fall," she said, "and $1,200 was the cheapest I could find."

The good news is that even with Paul's bankruptcy, Elva Pacific, an operations manager with Provident Bank Mortgage in Riverside, was able to qualify Paul for a loan for the purchase of a $180,000 home.

FOR THE RECORD
Los Angeles Times Thursday May 2, 2002 Home Edition Main News Part A Page 2 A2 Desk 2 inches; 53 words Type of Material: Correction
Student loans: An article in the April 21 Real Estate Section misstated that a candidate for a home loan had voluntarily chosen to repay student loans when filing for bankruptcy. Since 1998, student loans must be repaid even if the debtor has filed for bankruptcy, unless the debtor can demonstrate substantial hardship in repaying the loans, according to the U.S. Bankruptcy Code.
For the Record
Los Angeles Times Sunday May 5, 2002 Home Edition Real Estate Part K Page 5 Real Estate Desk 2 inches; 52 words Type of Material: Correction
Student loans-The April 21 Home Buyer Makeover misstated that a candidate for a home loan had voluntarily chosen to repay student loans when filing for bankruptcy. Since 1998, student loans must be repaid even if the debtor has filed for bankruptcy, unless the debtor can demonstrate substantial hardship in repaying the loans, according to the U.S. Bankruptcy Code.

"Paul has made a good faith effort" in reestablishing herself after the bankruptcy, Pacific said. Bankruptcy can be overcome if the borrower is given an opportunity to explain the circumstances.

"I put a lot of things into this decision," Pacific said. "You may be declined [for a loan] quickly because of a bankruptcy if a computer is doing the work. But when a human being is involved, that can be a different story....

"You might have to roll up your sleeves a little bit," she said, "but if you are determined, you'll get the loan."

The rules regarding bankruptcy vary depending on the type of loan, Pacific said. For FHA or VA loans, lenders look for a two-year period of good credit following a bankruptcy. For conventional loans, lenders demand four years of solid credit and proof that credit has been reestablished.

In Paul's case, she had signed for the purchase of an SUV for a friend. But when her friend reneged on the $450-a-month payment, Paul took over, even though she was living on student loans while getting her teaching credential and master's degree in education at UCLA.

She ended up accumulating $20,000 in debt on credit cards, some with interest rates of 25%. She declared bankruptcy in 2000, on the advice of a bankruptcy lawyer.

Four months later, the bankruptcy was discharged, meaning Paul was relieved of her debts. She opted, however, to repay the $35,000 she owed in student loans--$210 a month in payments she's kept current.

"She didn't back out of those student loans," Pacific said. "That was good."

A letter of explanation to the FHA, explaining these circumstances, would be sufficient to clear the bankruptcy for loan approval, Pacific said. "I consider [her bankruptcy] a one-time thing.... There are chronic abusers of credit and then there are isolated issues like this one."

With the bankruptcy issue solved, Pacific recommended a 30-year FHA loan with a 6.5% interest rate for Paul in the amount of $174,600. That type of loan would give Paul a monthly housing payment of $1,430--substantially more than the $650 a month she's been paying for rent.

But as Paul suspected, her mortgage wouldn't be much more than the rent for many two-bedroom units on the Westside.

The loan would require 3% down, or about $5,400, and an estimated additional $6,000 in closing costs--about $11,000 that Paul does not have. To bridge that gap, Pacific recommended that Paul apply for a special program administered by the Los Angeles County Community Development Commission called the Mortgage Revenue Bond program.

The program provides a 3.5% gift for first-time home buyers purchasing property in Los Angeles (outside Los Angeles city limits) and Orange counties.

The money does not have to be repaid and can go toward making a down payment on a home or for closing costs. All that is asked of recipients is that they attend an educational workshop. Currently, the maximum income limit for the program for one- to two-person households is $65,400; for families of three or more, the maximum income limit is $76,300, according to Los Angeles County program administrators.

The city of Los Angeles also offers a similar program for first-time home buyers purchasing property within city limits, according to Doug Smith, manager of the homeownership unit of the city's Housing Department.

Additionally, both agencies offer teacher-assistance programs where credentialed educators teaching in low-performing schools are given $7,500 toward the purchase of a home. Paul was not eligible for that program because Palms Middle School is not considered a low-performing school.

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