Log Home Mortgage Process
Most log home buyers will finance the purchase
of their home with a loan. Actually, if you're
building your home, you'll need two loans: a construction
loan and a permanent loan.
One Closing or Two
The construction loan is a short-term, interest-only
loan (6-18 months) to pay the cost of building
your home. When construction has been completed,
you'll need a long-term (typically 15-30 years)
permanent loan, or mortgage, to pay off the construction
loan.
This can be accomplished with two separate closings,
two sets of fees, and two appraisals — or
you can get a construction-to-perm loan that has
only one closing and one set of fees. This simplifies
the process considerably, and saves some money.
Interest Rates
Interest rates for construction loans may be somewhat
higher than for a permanent mortgage but it's
only for a relatively short term and you only
pay interest on the part of the loan than you
use as construction progresses. Therefore, it
may not be necessary to do a great deal of shopping
for the best construction loan rates.
Since interest rates for the permanent part of
the loan may be locked in at the time of closing
on a one-close loan, you can expect that interest
rates may be a little higher than current market
rates. The mortgage company is protecting itself
against future rate increases.
Application and Approval
There are two parts to the loan application process.
One part is about you and your finances, the other
is about the the house.
First is your credit application, with a statement
of your outstanding debts, your income, and other
related personal information. The loan company
will base your credit worthiness on this information
as well as your credit history report.
They will also determine if your debt-to-income
ratio falls within acceptable bounds. You can
do your own assessment using our Affordability
Calculator.
Second, to approve your construction loan, you
must show you own the land you plan to build on,
have signed contracts from your log home company
and builder, cost estimates, schedules, blueprints,
and permits. A "draw" schedule of payments
is completed and approved.
Appraisal
Once you have been approved by your mortgage company
or bank, they will order an appraisal of your
home's market value when it has been completed.
The appraiser will find comparable homes ("comps")
in your area that have sold recently and base
your value on those findings.
The amount that you can borrow is based on a
percentage of the appraised value, usually 80%-90%.
If you are unfortunate enough to have an appraiser
who is not familiar with log homes and undervalues
your future home, you may not get approved for
enough money to complete your home. In this case,
get another appraiser, or another mortgage company.
Closing (Settlement)
Assuming you chose a combined construction-to-permanent
loan, you will be signing all of the loan documents
for both loans. Your loan will convert from a
construction loan to a permanent mortgage when
your home is completed.
At settlement, closing costs are paid, all documents
are signed, any balance left on your land purchase
is paid off, and the construction phase of your
loan is initiated. A portion of the closing costs
may not have to be paid until modification, which
is the time at which your construction loan converts
to a permanent mortgage.
Construction Loan
Your bank or mortgage company will develop a schedule
of fund disbursements, showing when payments will
be made to the contractor, and how much. Typically,
payments are made at very specific stages of work
completion, and after inspections have been done
to verify the work.
It's important to stick with your budget and
not make major changes in plans during the construction
of your home. To do so will upset the loan amount
and schedule, causing troublesome procedural headaches
and delays.
Be sure that your loan disbursement plan agrees
with how your log home company wants to be paid.
This can be a major problem if not taken care
of early in the loan process.
As funds are disbursed, you make interest-only
payments on the amount of funds that have been
used up to that point. Early on, you make only
relatively small payments. Then, as the project
nears completion, you make larger payments for
a short period of time before you convert to a
permanent mortgage.
Permanent Mortgage
This part of your financing is exactly like a
conventional home mortgage. You will have creative
financing choices that may include 15 year
or 30 year fixed mortgages, adjustable mortgages,
hybrid fixed/adjustables, or interest-only mortgages.
Rates
may vary, depending on the mortgage type, number
of years, and your credit
score. Shopping around for the best rates
is usually a worthwhile exercise.
Depending on your debt-to-value ratio, you may
need to have Private
Mortgage Insurance, which is usually required
when you have insufficient cash for down payment.
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