by Doug Groff, American Home Bank
From Log Homes Illustrated 2007 Annual Buyer’s Directory
Courtesy of American Log Mortgage
Finding that perfect piece of land on which to build your new home, choosing a log-home manufacturer and a builder, and designing a floor plan are all extremely important aspects of planning your dream home. Ensuring that you are working with a lender that can provide you with the proper financing is also a crucial part of the process. Following are the top 10 questions that you need to ask prospective lenders before committing to finance your new log home with one of them.
1.Do you offer a “one-time-close” for my construction loan and permanent mortgage?
Some lenders will require you to close on a construction loan before you break ground on your new home. At that time, you will be required to pay closing costs for that loan. Then, upon completion of your new home, they will require you to go to closing again on a permanent mortgage to pay off the construction loan. Upon closing on the permanent mortgage, you will be required to pay another set of closing costs for the permanent mortgage. This is called a “two-time-close” scenario. You may be able to save several thousand dollars in closing costs, however, if you can find a lender that offers a “one-time-close,” usually referred to as a “construction-to-permanent” (CTP) loan. This is a construction loan that automatically converts into a final end loan mortgage once the new home construction is complete. This method requires you to have only one loan closing, thus avoiding having to pay for two separate sets of closing costs.
To get a CTP mortgage, you will need to fill out a loan application. The underwriter reviews the information and makes a decision about the approval of the loan. Upon approval, the lender will issue a commitment (approval) letter to officially state the loan’s closing conditions, which are the requirements for the loan to be approved. Standard closing conditions include an acceptable appraisal, title insurance, source of the funds needed to make the down payment and closing costs, signed contracts between you and your builder-contractor, and any applicable insurance policies (homeowners and flood).
The appraisal is a very important part of the mortgage process. In order to initiate the appraisal, the lender will need a copy of the following items:
Building Plans. The plans need to show dimension and elevation measurements for the new home. Preliminary plans can normally be submitted for appraisal purposes, as long as major changes to the footprint of the home are not made. For example, changing the square footage or adding or deleting rooms is considered a major change. Major changes can alter the home’s appraised value and can change the loan scenario.
Specifications. The specifications are a listing of all of the building materials that will be used during the construction process. The specifications will be collected for the appraiser to assign proper value to the home. Because the quality and cost of materials can vary greatly, specs are an important part of the appraisal.
Building Contract. The building contract is a binding agreement between you and your builder-contractor. This agreement lists the scope of the work to be completed and at what price.
Log Package Contract. This is a binding agreement between you and your log-home manufacturer that states the cost of the log package.
Legal Description for the Building Lot. The legal description states the boundaries, dimensions, and size of the lot.
Title Insurance. A local title company or attorney in your area prepares and sends the title insurance to the lender. The title insurance insures you and the lender against any unknown liens that may exist against the lot.
The timeline for the CTP loan is as follows:
Initial Settlement. The lender sends the closing agent a set of closing instructions and closing documents, which tell the closing agent how the lender wants the closing documents to be executed. The closing agent reviews and executes the settlement documents with you. At this time, the seller of the building lot is paid in full and the lot transferred into your name (if you do not already own the lot prior to initial settlement). The documents are then recorded in the local courthouse. After initial settlement, the construction of the new home can begin.
Construction of Your New Home. During construction, money is disbursed to you and your builder-contractor to fund the building process through completion. Funds are disbursed according to a schedule. During construction, you will normally make interest-only payments to the lender on the funds as they are disbursed. A property inspection must be completed prior to the release of funds. The lender will have an inspector visit your lot prior to releasing each construction disbursement and the inspector will determine if work is progressing according to the disbursement schedule. When the inspection report is received, the lender will release funds based on the inspector’s assessment.
Interest Rates. There are normally two interest rates involved with a construction-to-permanent loan. They are:
• Construction Rate. This is the rate at which you are making interest-only payments as funds are disbursed during construction. This rate is usually locked sometime between the loan application and initial settlement.
• Permanent Rate. This is the rate of your actual end loan mortgage. This rate is locked sometime between loan application and the time at which your new home is completed. It is the long-term mortgage rate that is used to repay the funds that were borrowed as part of the construction loan.
2.Do you require log-home comparables for the appraisal process?
As mentioned before, the appraisal of your new home is a crucial step in the financing process. Your lender will require that the appraiser provide at least three comparable homes from which to derive the value of your new home. The appraiser finds comparables by searching the housing market around your new home for other homes of similar size that have been resold within the past 12 months. When financing a log home, many lenders will require exclusively log or timber-frame comparables for the appraisal. This can cause problems because there may not be any other log or timber-frame homes in the area where you are building. And if there are, they may not have been resold within the past 12 months. A lender that will accept conventional homes as comparables and not limit the search to only log or timber frames may make your financing process much smoother.
3.When will the lender pay for the log materials package?
Most log-home manufacturers require payment for the entire materials package upon delivery to your building site. Many lenders, however, will not pay for the materials until they are attached to a foundation. Unless you can pay for the materials package with your own funds, it is in your best interest to find a lender who will pay for the log package prior to it actually being delivered to your building site.
4.Can I use my loan to pay for my milling deposit to the manufacturer?
Most log-home manufacturers will also require a deposit prior to milling your materials package. They want to make sure they have a solid commitment from you before they put forth the cost to cut your package. Again, many lenders will not pay for any part of the materials package until it is attached to the foundation. If you don’t have the funds to pay the deposit out of your pocket, make sure your lender can accommodate you by paying it out of your loan.
5.How long is the construction term of the loan?
It is very important that you ask your builder-contractor how long it will take to have your new home completed. You then need to make sure that your lender offers a term that is long enough to allow your contractor a comfortable amount of time to finish construction. Construction terms vary from lender to lender. These terms can range from six months up to 24 months.
Your end loan mortgage rate is the rate at which you will be repaying your mortgage for the life of the loan. Some lenders will allow you the option to lock your end rate prior to your new home being complete. These lock terms normally range from 15 days up to one year.
7.Does the lender have a builder-approval process?
In addition to approving you for a loan, some lenders require that your builder go through an approval process as well. Your builder may have to submit her business financials to the lender to obtain approval to build your home. Some builders have no problem doing this, while others do not want to disclose their personal information to the lender. If your builder is uncomfortable releasing such information, it may benefit you to find a lender that does not have a builder-approval process.
8.Does the lender have flexible disbursement schedules during construction?
Each construction project is different, and each builder-contactor’s payment requirements vary as well. It is very important to ensure that your builder and lender will work well together. One very important aspect of the relationship between your builder and lender is the construction disbursement schedule. Some lenders have a set disbursement schedule from which they cannot deviate. This may cause a problem if the lender’s schedule does not meet the needs of your builder. Therefore, it may benefit you to find a lender who has flexible options.
Some lenders offer an option that is referred to as a “staged” disbursement schedule. This type of schedule groups various aspects of the construction process into stages. When everything in each stage is complete, the lender will release the amount of money designated for that stage to your builder. Another option that some lenders offer is called a “line-item” disbursement schedule. A line-item schedule lists each aspect of the construction process individually and designates an amount for each. The builder can then request payment as each item is complete, rather than having to complete multiple items and waiting to be paid for all of them at the same time.
Keep in mind that your lender will send an inspector out to your lot to make sure that the work has been completed prior to releasing any funds. Inspectors charge a fee each time they are asked to perform an inspection, and you normally pay that fee. So, the more inspections that must take place, the more inspection fees you will incur.
9.How many log homes have you financed?
Log homes are unique, and so is their financing. It is to your advantage to choose a lender that is experienced in financing these types of homes. The entire process will be smoother. You don’t want your lender “practicing on you.”
10.Can you provide me with testimonials from some of your past customers?
You want to make sure that you are working with a lender that will provide the high quality of service that is required to get your dream home completed with minimal problems. Lenders that consistently exceed customer expectations should have no trouble providing numerous testimonials from their past customers.
This is most likely the home that you have been dreaming about for years. Teaming up with a lender that can meet your needs will help ensure that your home-building process is as easy and painless as possible.