All too often, we figure out how much we think we can budget for a mortgage and expect a lender to agree. Unfortunately, log home financing doesn’t work that way.
To get an idea of how much a lender will approve for your log home financing, multiply your annual income by 36 percent. Next, subtract the money you spend each year for paying down debts (car loans, student loans, credit card balances) and for taxes and insurance on real estate.
The answer is the amount most lenders believe you can allocate toward your monthly mortgage payment. To confirm your status, arrange to get pre-approved for financing. The process varies from a simple telephone interview to a detailed inspection of income-verification documents. It’s important that you find a lender who understands the marketability of log homes.
Lenders who make standard loans only on existing conventional home purchases may not be very interested in lending on an unbuilt custom home because their appraisers may not be able to find comparable homes to determine potential resale value once the home is built. Lenders whose experience is limited to conventional homes may not understand how log homes are built.
If they believe log homes are still cabins in the woods, for example, they may feel uneasy about making a loan on one. To satisfy lenders’ requirements for making loans on custom-home projects, you’ll need additional documentations: construction drawings, soil and other tests, permits, supply list, budget, log producer’s information sheets, builder’s list of qualifications on similar projects.
If you’re planning on doing much of the work yourself or if you’re going to be the general contractor overseeing subcontractors, expect to produce documentation verifying your qualifications.
Knowing how much of a mortgage loan you qualify for is crucial, but it’s far from being the whole story. Building a log home also requires a construction loan. As its name implies, this loan covers the cost of actually building your home, from site preparation to certificate of occupancy.
The construction loan usually carries a higher interest rate and a shorter payback term than a conventional mortgage loan. Its appeal to the borrower is that it entails paying only interest.
When the home is built and approved for occupancy, the mortgage loan pays off the construction loan and takes over the financing of the finished home. When you apply for a construction loan, you’ll need certain documents in addition to your own financial statements.
Among these items are proof you own the land where you’re building, a sales contract from your log producer and a receipt for your deposit on the package, final blueprints and specifications, estimates or bids from contractors and subcontractors, and a building permit.
If borrowers have trouble getting financing, it usually involves the construction loan. Some banks shy away from them because they involve more risk.
Unlike mortgage loans, construction loans have no dwelling to secure the loan and sell if the borrower forfeits, only an assortment of building materials and possibly land, if the borrower used the property for collateral. The risk is even greater, in most lenders’ eyes, if the borrower is the person who’ll be performing or supervising construction.
The ideal situation is finding a lender who’ll handle both your construction and mortgage loans. A few companies even specialize in both types of loans specifically for log homes.
After an appraiser uses final plans and specifications, regional property values and comparable existing homes in your area to develop a value figure for your proposed home, the lender determines the loan-to-value ratio (usually 90 percent) and issues a commitment letter that indicates formal approval for the loan.
This letter is required before construction funds are approved because it guarantees that the construction loan will be paid in full by the long-term mortgage loan when the home is completed. The final step is the actual closing of the loan. All terms are legalized, and papers are signed.
A characteristic of construction loans is the draw schedule. This involves scheduling payments over a specified period of time to meet expenses as they occur. Such an arrangement ensures that work is performed according to a schedule to turn the building materials into a home.
The number of draws and percentages of the loan disbursed vary according to the terms stated by the lender. For instance, some lenders will pay for the log package on delivery; others may withhold payment until it is actually erected. Be sure the terms of your construction loan are in accordance with your log-home producer’s requirements so that delivery and erection proceed smoothly.
A typical draw schedule might call for four to six payments, spread out to cover site prep and foundation excavation; the cost of the log package after it’s delivered, erected and under roof, and the windows and doors have been installed; after the electrical wiring, plumbing and heating-cooling systems are installed and approved, cabinets installed and interior doors hung; and the balance after the remaining interior work is finished and the occupancy permit issued.
Regardless of how your draw schedule is arranged, the lender will inspect the progress of work up to that point and approve the disbursement of funds. In some cases, the lender may withhold the final payment until you have lien releases from the contractor and all subs. Self-discipline is required with regard to change orders.
It is tempting, once construction is under way, to decide to fine-tune the project or even upgrade the finishing work. But the loan was based on carefully calculated figures. There’s always going to be some wiggle room, and you should have a contingency set aside for unanticipated expenses, but indulge yourself during the planning stage, not after the project has begun.
If you’ve tied up all your cash and need some money for contingencies and to pay for materials or labor before the first scheduled draw, you can apply for a bridge loan. This interim measure may be a small commercial loan or a home-equity loan on your existing residence.