As you begin the process of financing your log or timber frame home, you will find that there are some differences compared to financing a conventional home. The following is a list of things to consider:
Selecting A Lender
- Look for a loan officer who is experienced in construction lending, preferably experienced in log homes or timber frame construction. You will want to deal with an expert that you can rely on during the building process.
- Be sure your lender will accommodate the required payment terms of your log home or timber frame company. Understanding this upfront can save many challenges later in the process.
- During your research, you will find that lenders offer two types of Construction loans:A “Two-time Close,” means the lender will provide you with a construction loan that will need to be refinanced into a new permanent mortgage loan once the home is completed. This type of transaction requires that you re-qualify for the new permanent mortgage and it also requires that you pay two sets of closing costs.
A less expensive approach may be a “One-time Close” loan. In this situation, the lender provides one loan for the construction period. When the home is complete, the loan will automatically convert to a permanent mortgage. Lenders policies vary, but for the most part, this type of loan will not require you to re-qualify or pay new closing costs when the home converts to the permanent mortgage.
Typically, during construction, you will pay an interest only payment based on what you owe each month. As your balance increases, so will your monthly payment. When the home is complete, you will begin to pay a Principal, Interest, Tax and Insurance payment (like that of a normal conventional loan). Construction loan terms vary from 6 months to 12 months and beyond. Check with your lender.
Getting Your Loan
- Once you have determined which lender you will use, it is recommended that you apply for your financing early on in the process. Understanding how much you can qualify for up front will aid in your discussions with your log or timber frame company as well as with your builder. Most lenders do not charge for a pre-approval.
- Understanding the real estate market in the area that you are going to build can be very useful. It’s important for your lender to know if your new home will be marketable in your area. It’s critical that you discuss these items with your lender up front. It can save you from challenges late in the processing of your loan.
- What type of down payment is going to be required? You will find that each lender has different policies. Most lenders will require or 20% – 50% down payment (down payment percentage is typically determined by your loan size)If you own the land outright, the equity in the land may count towards your down payment needs. Discuss your scenario with your lender up front to determine if you will be expected to bring any cash to the loan signing.
- Are you considering beginning any construction work on your site prior to loan signing/closing?Pre-start activity is generally acceptable, but you should check with your lender before beginning any construction work on the property. There may be a challenge with the Title Company insuring the lender if any work has begun prior to the loan signing.If it is determined that it is acceptable to begin work ahead of time, keep good records of anything you pay for out of pocket. You may be asked to prove payment for these items. Once your initial down payment is made, any excess items paid for may be able to be reimbursed to you at the loan signing. Discuss this with your lender to see if you can be reimbursed for any of these items.
- What happens if your costs exceed your original budget? This is a common occurrence with construction projects. The excess can be caused by something outside of your control or can be caused by an upgrade that you make along the way. Either way, if there are not sufficient funds in the loan to pay for the overage, then you must pay for it with your own cash. Perhaps a better way to handle this would be to build a contingency factor into the loan amount. Ask your lender to explain their policy on the use of contingency dollars.
- Is Interest Reserve an important feature for you with the construction loan? Interest Reserve is a dollar amount that is added to your loan and is used to make your monthly interest payments during construction. Instead of writing a check each month for the interest that is due, the payment is taken out of your loan and made for you. During construction you actually make no monthly payments. At the end of construction, you owe more money because you have borrowed those monthly payments using the loan proceeds. This feature is may be useful if you are selling your current home while living in your new home during construction.
- Are you considering being an Owner-Builder? Being involved in the building of a Log or Timber Frame home appeals to a lot of people. If you are considering overseeing or actually doing some of the construction work on your own, please discuss this with your lender up front. Some lenders will want to be sure that you are experienced enough to oversee the project. You may be asked to provide a resume of your experience as it relates to construction. Other lenders may not allow you to be an Owner Builder at all. Be sure your lender will accommodate this for you.