Swept up in credit crisis

CREDIT CRUNCHED | How the mess affects a new home buyer and a high school senior

April 14, 2008

BY FRANCINE KNOWLES fknowles@suntimes.com

Nicole Flora, a first-time home buyer with good credit, and 17-year-old graduating high school senior Alexandra Torres never expected to be caught up in the mortgage meltdown mess and the credit crunch that resulted.

But the situation is intruding on their lives nonetheless.

» Click to enlarge image

Nicole Flora (left) was able to buy this home -- but she had to double her down payment. Roberto Clemente senior Alexandra Torres has a 3.5 grade-point average and has been accepted to Northeastern Illinois. But because of the credit crisis, she could have trouble getting loans to pay for her education.
(John H. White/Richard A. Chapman/Sun-Times)

Last month Flora was all set to close on a $220,000 McKinley Park home for her and her 9-year-old daughter, having secured a 30-year fixed mortgage with a 6.25 percent interest rate, helped by her 681 credit score. She had no problem providing the 5 percent down payment she said she was told would be required. But then after her closing had been scheduled, she got the bombshell news the lending requirements had changed. Instead of the $12,500 she'd planned to put down, she had to come up with $25,000, despite having what the rating agencies classify as a good credit score.

"I was actually told I was good as gold," she said. "Then before I knew it, they never said it was bad. But it wasn't good enough anymore.

"I was highly upset. I had already put an offer on the house. We already had a contract. I already had an inspection. Money was already invested. It was pretty emotional. You can imagine.

"I have always paid my bills on time," she noted. "I think I was pretty much a good candidate to buy a house. I absolutely didn't expect this."

Flora decided to proceed with the purchase although it depleted her savings.

She'd been pre-approved for a much bigger mortgage: $275,000.

After her experience, her advice to first-time buyers in these uncertain times is: "What they tell you today it might not be the day of closing. Anything can happen."

Meanwhile, Roberto Clemente High School student Torres, who's been accepted at Northeastern Illinois University, knows her parents can't afford to pay for her college education. So armed with a 3.5 grade-point average, she is in the process of applying for scholarships and has completed the Free Application for Federal Student Aid form to pave the way for access to college aid and, if needed, loans.

"I've just been saving up as much as I can in order to pay at least something," she said. "Whatever I can't pay, maybe I'll think about getting student loans."

Torres, who plans to major in biology to pursue her dream of becoming a veterinarian, said she hasn't followed news of continuing problems in the housing market and the credit crunch that's resulted.

But Andrew Davis, executive director of the Illinois Student Assistance Commission, has. He's worried students like Torres will face challenges because lenders have been withdrawing from government-backed student loan programs and private loan programs because of their inability to access funds to lend in the wake of the credit crunch. And while there are plenty of lenders still in the market, he predicts, "there will be issues that will range from less choice to less desirable terms on which the loans will be offered."

Qualifying for private loans will be more difficult and fees will be higher, he said.

And while the federal direct student loan program, which gets its funding directly from the federal government, hasn't been impacted, he doesn't believe that program is immune from potential problems.

"The direct loan program does about 20 percent of the overall federal lending effort," he said. "A number of schools are moving to the direct program because they see that as a way to safeguard their access to money for their students. The Department of Education has said they believe they have the ability to double the amount of lending business they do from a processing standpoint. If they go from 20 percent to 40 percent, that's great for the 40 percent."

But that could leave many students out of the program, he noted.

Contributing: AP