Not just anybody can walk into a bank off the street and qualify for a loan—especially since the banking crisis in 2008. Banks now use stricter qualification processes to approve individuals for home loans to reduce foreclosure and delinquency rates.
This isn’t a bad thing, but it does mean that you should understand the basic qualifications for a home loan. Most loan officers are going to look at these four things.
Total monthly loan payment as percentage of income
Your total monthly loan payment on your home loan—including principle, interest, insurance and taxes— should not exceed 30% of your gross monthly income. In other words, your gross monthly income would have to be at least $4000 to qualify for a maximum monthly mortgage payment of $1,160. Some banks are a little more lenient on this than others, but as a rule of thumb you never want to extend yourself very far past this number.
Total payments on all loans as a percentage of income
The loan officer will also take a look at any other loans you are currently paying off. You don’t want your total monthly payments on all loans including home, auto, personal, or credit cards to exceed 41% of your gross monthly income. Going back to the example we used earlier, a person with a gross monthly income of $4,000 should not be extending past $1,640 in loan payments per month.
20% down is required
You should be able to secure at least 20% of the cost of the home and land with cash. It is possible to use the land value towards this percentage and make up the difference in cash. For example, if you secured a $37,500 plot of land for a $250,000 home, you would still need to put down $13,500 to make up the cost of the home.
Check your credit score
It’s time to listen to all of those annoying commercials on TV and make sure your credit score is as you expect. Check your personal credit history just to make sure that you are blemish-free. If you do find some sort of red flag on your credit score, that doesn’t automatically disqualify you for a loan, but you will need to be prepared to explain it to the loan officer.
Even if you know that you’ve always paid your bills on time and you have nothing to worry about, it’s a good idea to double-check. A 2013 Federal Trade Commission study found that 1 in 5, or a whopping 20% of Americans have errors on their credit reports. That’s a scary thought, but you’ll want to make sure you’re protected.
Financing your timber frame is not something you should take lightly. Setting and sticking to a budget can be a difficult task, but we’re here to help you every step of the way. To get you started, we’re giving away our eBook: Everything You Need to Know About Financing Your Timber Frame Home. This is your guide to navigating the confusing world of financing and planning to start building your home.