How Much Credit Can You Take On?
One of the reasons for the downturn in the mortgage business as this book was being written was the huge number of overextended buyers struggling to make their payments in a rising rate environment. Why were so many people so overextended? A major reason was the high debt-to-income (DTI) ratios allowed by many lenders.
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A low DTI makes you attractive to lenders. The desired number is 36 or less. Lenders look at DTI in addition to your credit score because the credit score doesn't reflect income and DTI does. That's why they use both to complement each other in making the decision.
Here's how you lower your DTI ratio:
Review your budget, or make one for the first time. Figure out where to squeeze extra dollars out of your spending and then apply them to any outstanding credit card bills.
Put your credit cards away and convert to debit. Learn to live with cash.
Get some good advice. Consider working with a financial planner to get all of your finances in order.
The mortgage credit crisis of 2007, like most cyclical events in economic history, served as a reminder of a very simple concept: Don't buy what you can't afford. Of course, when an entire financial industry pushes irresponsibility, it is up to individuals to be realistic.
