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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