It’s an exciting time. You’ve finalized the design of your home, chosen a log and timber home manufacturer, decided on a builder to construct the home, and you’ve even squared away your land with a survey and title search. Everything is ready to go.
So now you are ready to obtain a mortgage with a lender and pull the trigger on this project. Get started comparing lenders with these nine strategies from the Log and Timber Homes Council, part of the National Association of Home Builders. The Log and Timber Homes Council provides these tips to help consumers make the most informed decisions when making their dream home a reality. Click here for a list of log and timber home lenders.
1 Compare & Contrast Lending Programs
You can start with your local bank on Main Street, as well as with regional or national lenders. You can also sign up with referral websites to receive information from scores of lenders competing for your business. If you choose the latter, you may want to create a disposable email address because you will be inundated with offers.
Your current financial situation, long term goals and advice from your lender can help you determine if you will be opting for a fixed rate or an adjustable rate loan. Keep in mind that banks and lenders charge fees for just about everything, usually based on a percentage of the loan amount. Lenders also differ in the amount of closing costs and inspection fees in different locales, so it’s helpful to compare and contrast different loan programs.
2 Construction-Permanent Loan Option
The most desirable loan to obtain is a one-close, construction-permanent loan. This is a single loan that accomplishes two things with only one set of closing costs. The construction portion pays builders, subcontractors and materials suppliers in a series of draws. Once the home is constructed, the loan is automatically rolled into a typical mortgage payment. Depending on where you are located, local lenders may or may not offer construction-permanent loans. If you don’t have that option, you can obtain two loans and take the hit on paying closing costs for both.
How Construction Loans Differ From Mortgages
- Construction loan payments are typically interest only payments
- Interest is assessed monthly on the outstanding loan balance
- Higher risk for lender, which is why there is a higher interest rate
- Typically secured by land
- Appraisal based on the use of blueprints, specs and pricing
- Value is determined by the selling prices of nearby homes
- Short term (usually six to 12 months)
- Paid off by proceeds from permanent mortgage loan at completion of home
- Secured by home and land
- Based on appraised value of home checked against selling price of nearby homes
- Loan disbursed in a single payment at settlement
- Lower risk for lender because loan is secured by house and property
- Lower interest
- Long term (usually 15 to 30 years)
- Monthly payments include both interest and principle
- Paid off by principle portion of monthly payment over life of mortgage
3 Look For Log Lending Experience
It’s important to shop for lenders that have experience with log and timber homes. If you are working with a local builder/dealers representative, they can often recommend lenders they have worked with in the past. Your local builder or log and timber home manufacturer can help you prepare some of the building documents your lender will need, including final construction plans. When shopping around, ask the lender if they have recently (in the last year or two) created loans for other log and timber home buyers? That simple question can save you a lot of headaches. A lender versed in log and timber homes can help you with paperwork and point out problem areas that other lenders might overlook.
4 At Issue: A Fair Appraisal
Perhaps the biggest advantage for using a lender familiar with log lending is the issue of obtaining a fair appraisal of your future dream home. Lenders without log experience will assume they have to find comparable sales of other log and timber homes within a 10-15 mile radius. Since log and timber homes are rarely sold (homeowners tend to make these their last home, then bequeath them to their relatives), this can be problematic for the lender. Lenders experienced with log and timber homes may not require a log and timber home comp. They simply compare against other custom homes. The Log and Timber Homes Council also has information for appraisers on this website, which indicates that comparable value can be found in other custom homes with similar amenities.
5 At Issue: Construction Terms & Schedule
Have you ironed out a construction schedule with your builder, including a start and completion date? This will be important when shopping for a lender, specifically the terms and schedule in the construction portion of the loan. Lenders locked into a conventional home program may only allow six months, with significant penalties beyond that time frame. Ask your lender what the time frame is and what the penalties are if you exceed the construction time frame.
6 At Issue: Draw Schedule
Construction loans are paid out in a series of payments or “draws.” The draw schedule lists work that must be completed for each payment. An inspector hired by the bank will visit the job site to verify that necessary work is completed before issuing a draw check. At issue is the difference between conventional and log construction. In stick frame construction, the framing portion of the job is covered by a builder’s line of credit with the local lumber yard. Log home manufacturers naturally want to get paid when they deliver your log and timber home package to your jobsite. Again, a lender familiar with log and timber home construction will issue a payment for these materials. Ensure your lender is familiar with this portion of the project.
7 Compare With Good Faith Estimate
The only way to sort out the best deal for you is to ask for a good faith estimate of all fees and closing costs from each lender you are considering. While the ultimate cost may not exactly be 100% of that good faith estimate, it shouldn’t be dramatically different. If a lender or broker hesitates to give you this estimate in writing, find another broker or lender.
8 Have Contingency Funds
Most lenders advise buyers to set aside a contingency fund of 10% of the cost of the project, to cover unforeseen costs. This ensures you will be able to complete your home in a timely fashion and avoid any penalties for exceeding your construction schedule limit.
9 Where Are the Lender’s Decision Makers
If a lender’s decision makers are cross town or across the nation, this can impact the speed of decision making. If the lender has everyone in one office, including loan officers and support staff, can enable them to work faster than others spread out across the country.