Unless you have the cash to purchase outright, one important element in planning your new log home is determining how the project will be financed. Financing a log home is very similar to financing any other newly built home, with just a few extra factors to consider. The following post outlines the financing process and discusses different options that may be available.
The most common approach for obtaining log home financing is also the approach used for most new home construction. This involves arranging a construction loan to cover the costs incurred during the building of the home. The construction loan is then replaced by a permanent mortgage once the log home is completed.
Depending on the lender providing the financing, the construction loan and permanent mortgage may have separate loan closings, or they may be finalized in a single closing. Lenders can provide information on how they handle these transactions.
Construction loans are structured so that payments, or draws, are made to the log supplier and the builder as the building process reaches certain milestones, for example: log delivery, foundation completion, wall completion, etc. For log homes, it is important to recognize that one of these draws will need to be made to the log home company when the pre-cut and milled logs arrive at the job site. Banks who are experienced with log home lending are well aware of this factor; banks that are less familiar with log construction may need to adjust their draw schedule to accommodate the payment for the logs.
Securing a construction loan will require that you have a contract with a builder that specifies the cost to build your log home. The builder can provide a contract once you have supplied him with detailed log home plans. So, the first step in this process is to work with a log home company to develop a set of detailed plans that can be taken to a builder.
Log Home Mortgages
Log home mortgages are generally identical to mortgages for an ordinary house. Here are a few key considerations that a mortgage lender will be interested in:
· What credit scores are required to get a mortgage?
Different lenders have different credit score guidelines. Using relatively recent data, most mortgages are made to people with credit scores of 620 and higher. Some government-backed loans may be approved for scores less than 620. If you have other compensating factors, such as the ability to make a higher down payment (counted as equity), you may secure a loan with a lower score. Also, it may be possible to improve your credit rating by reducing credit card debt or addressing negative factors in your credit record.
· How much of a down payment is required as initial equity for a log home mortgage?
Lenders generally prefer to work with borrowers who have 20% or more of the total cost of the home as equity, though some lenders can work with lower amounts. In addition, many lenders will count any equity value in land that is owned toward the total equity of the log home project. Generally, land that has been owned less than a year is valued at the purchase price, while land owned for longer than a year is appraised at current market value. There are some exceptions to this rule. Loans sponsored by the FHA or VA may also allow for lower down payments.
· How much liquidity are lenders looking for?
Many lenders like to see that you have liquidity, which means having cash reserves on hand once you have made your down payment. Guidelines vary between lenders, but having some level of reserves to cover unexpected expenses that may arise is a definite plus.
· What is the required ratio of monthly mortgage and other expenses to monthly income?
Different lenders will have different guidelines, but they will be interested in this ratio to ensure that you are able to afford to make the mortgage payments and your other monthly expenses. Income from all sources can generally be counted in this ratio. Self-employed borrowers may have to provide extra documentation to support their income levels.
· Will your log home be sufficient as collateral for the loan that you want?
The lender will look to ensure that the log home can be built within budget and will be a marketable house when it is finished. They will have an appraisal done that will estimate the market value of the finished log home, taking into account the size and design of the home, as well as the surrounding neighborhood and other factors. Houses that have very unusual or specific features (such as too few bedrooms or bathrooms, unusual floor plans, etc.) may be difficult to appraise, and could result in a lower appraised value.
Home Equity Lines of Credit
If you currently own a home, even one that you are planning to sell, you may be able to use a Home Equity Line of Credit (HELOC) to help finance your new log home. This process can be much simpler and faster than securing a construction loan and a mortgage, since many lenders have expedited programs for establishing a HELOC. The key is to have available equity in your current home that you can borrow against.
As with construction loans and mortgages, the interest on a HELOC is generally tax deductible. If you are planning to sell your existing home when the log home is finished, the proceeds of the sale are then used to pay off the HELOC.
Identifying Log Home Lenders
There are many lenders that will provide financing for log homes. These lenders range from the largest banks with a national presence, to smaller, local banks that do business only in a specific area. Often, local banks are in a better position to offer more flexible terms and conditions for a log home loan. It can be helpful if you already have a personal financial relationship with a particular bank (checking accounts, savings accounts, 401ks, etc.). Also, don’t forget about your local credit union. Often, they work closely with their members to provide a level of service not always provided by an unknown bank.
Although many banks provide mortgages for log homes, you may encounter a lender who is not familiar with the concept of log homes or the benefits that they provide. It might even be the bank you have used for years. These lenders may not be able to finance your log home. Don’t be discouraged if you encounter one of these. There are plenty of resources available through the internet or the log home industry to guide you in your local area.
Finally, it is a good idea to identify multiple options for your log home financing. In today’s credit environment, with widely differing requirements and standards between lenders, it can be difficult to predict whether a given home loan will receive approval. It is not at all unusual for one lender to readily approve a loan that another has turned down. For this reason, it is a good idea to have at least one or two alternative lenders identified in case your initial attempt is not successful.