Sunday, July 29, 2007

How Much Debt Can You Afford?

by Nancy Osborne, COO of ERATE

This is a timely question considering the escalating mortgage delinquency rates reported almost daily. With the recent calamities in sub-prime lending at the forefront of the news, what should be obvious to most of us now bears repeating, don't borrow based upon what a lender alone informs you that you may qualify to borrow. Remember most lenders compensation is commission based and calculated as a percentage of the amount that is borrowed, thus the higher the loan amount, the higher the loan officer’s or loan agent's commission. This is an obvious conflict of interest but unfortunately it exists and not just on the loan side but it can exist on the real estate side at times as well. Real estate in general operates as a referral business so both a loan and a real estate agent likely want to do a good job for you so they will receive the highest compliment you can give them as a satisfied client, your personal referrals. However make no mistake about it these professionals are not always working as your fiduciary, that is to say they are not always duty bound to work in your best interest.

It seems that the process of underwriting loans with increased speed and technology, as well as advances in credit scoring, have not only brought faster loan decisions but riskier ones as well. No one should tell you how to run your personal finances but you. The seemingly old fashioned rules of lending used to reflect a housing ratio of only 28%, which meant that if more than 28% of a prospective borrower’s gross monthly income was being applied to their mortgage payment they would not qualify for the loan. However because today Uncle Sam has an even bigger hand in our collective pockets (this is why it takes two incomes to support a family where one used to do the job), this old formula of underwriting might need updating and should make today's lending ratios even more conservative as we all have less take home pay (or net income) than we had in the past. This concept is in sharp contrast to the now liberal lending practices that have been in place over recent years.

Moreover with the recent changes to the bankruptcy laws which occurred in 2005, a borrower cannot easily get off the credit hook. Once you find yourself in over your head and are left with damaged credit, bankruptcy is not the viable option it once was. Therefore it is more important than ever to make informed decisions in taking on both mortgage and consumer debt and not to assign this responsibility to a professional who may be benefiting financially based on the amount of debt they can persuade you to take on. Don't feel as though you've won the lottery when your lender tells you that you may qualify to borrow more money than you thought possible, they are not doing you any favors if you cannot comfortably repay the debt. Remember, borrow only the amount of money you yourself feel comfortable repaying as the lender who approves your loan is not the one obligated to repay it, you are.

In the end you yourself are the best judge of what you can repay and certainly not a commissioned professional or loan underwriter. Always do your personal finance homework on your own before seeking out any type of loan for no one knows or should know your finances better than you and no one can better predict what your earnings will be in six months to a year better than you can. The risk of borrowing excessively is disproportionately yours, not your lenders, so make this decision responsibly and make one that suits your lifestyle as well as the projected stability of your income.

Nancy Osborne,   Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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