You can picture enjoying your new log home with family and friends. Even though interest rates are rising, these five steps will help you map out an affordable plan to build.
With recent market shifts, you may wonder about your ability to build that log cabin you’ve been dreaming of. A methodical approach to understanding today’s market and mapping out these steps will get you on a path from log cabin imagination to reality.
Understand today’s changing market.
Some banks are finding creative ways to counteract the market shifts that have started to take place in recent months. The bidding wars over existing homes are starting to settle out, bringing home values down somewhat. At the same time, materials costs for construction are not coming down. A second shift is that with growing inflation…interest rates are climbing. These factors can add up to home values sometimes coming in under the cost to build, but some banks are offering alternative loan options to help manage the overall loan cost.
For instance, Rhonda Croft, Vice President of Federal Savings Bank in Fort Collins, Colorado, said, “For some of my customers where the home value and building cost are not aligned, they realize that in the long run, their home will be worth more. So, they will come up with cash for the difference in the loan amount and the estimated value. Other customers who can’t do that still have options. Our bank has created our own portfolio program offering an ARM (Adjustable-Rate Mortgage) loan for an interest rate below current market rates — and we can often qualify folks even for a new construction loan at that rate. The loan rate remains fixed for five years, allowing them to have a consistent payment and then refinance, if necessary, later when the market recovers.”
Research the types of loans you will need.
Depending on your situation, you may need two loans — one for the construction of your home, followed by a mortgage loan to pay over a longer period once your home has been built.
Borrowing money to build a home (construction loan) is different than borrowing to buy an existing home (mortgage loan). The main differences are that a construction loan represents a higher risk to the lender because it is secured only by land until the house is completed, it may have a higher interest rate, is shorter term (usually 6-12 months), and can be paid off by proceeds from the mortgage loan once the home is completed. By contrast, a mortgage loan represents a lower risk to the lender, can have a lower interest rate, and is longer term (usually 15-30 years). Another difference is that a construction loan is disbursed in a series of “draws” as the work is completed, whereas the mortgage is disbursed in a series of “draws” as the work is completed, whereas the mortgage is disbursed in a single payment at settlement.
You may also consider a mortgage buydown which means that you prepay for interest points upfront, which can reduce your monthly payment and help you pocket interest savings long term. As you’re looking for opportunities to save money during this time, a mortgage buydown is one solution that can lower your monthly payment. In essence, you pay more money upfront in exchange for a lower interest rate on your loan going forward. Ask your lender about the various buydown options available such as a permanent, fixed rate reduction and 3-2-1 buydowns which offer much higher immediate rate reductions that are gradually reduced in the first three years and returns to the standard rate in year four, and on.
Find a good lender.
Many national banks and regional lenders no longer offer construction loans for home building. This is partly because construction loans come with higher risks and lower returns. You are better off approaching local lenders, credit unions, a Farm Credit Service, or a regional bank. Certain banks also have more experience with log home construction loans and understand the intricacies of this type of build.
Your lender will want to know whether you are hiring a general contractor or attempting to build it yourself. A lender is more likely to determine a lower risk, and therefore higher likelihood of funding your loan, when a professional builder will do the work.
Gather information for the lender.
Your banker will need a lot of information to qualify you for a loan. Aside from documents such as your income,
assets, bank statements, credit score information, etc., your banker will want to know exactly what you’re going to build, how much it will cost, how long it will take, and who will do the work.
You will need building permits, a sales contract from your log home manufacturer, plans and specifications, cost estimates, and builders’ contracts. If you are acting as your own General Contractor, you’ll need a statement of your construction abilities. The bank will also need to see your land survey or plot plan, land deed, and comps of any nearby log homes.
Manage your loan-to-build schedule.
Once you submit your loan application, and after you get your funds, the clock starts ticking with both the bank and the log home manufacturer. It is important to align the timing of the loan and the construction process.
Start making a list of all the costs for your home. Think of it in stages: list the costs of land preparation, utilities connections, laying of the foundation, roadways, and driveway, and permit and inspection fees. Then list costs for the log home kit, delivery fees, equipment to unload the kit, erection of the log home, window and door packages, and roofing. After that will come costs for the installation of plumbing, electricity, and HVAC systems. Finally, determine costs for interior finishes like flooring, lighting, cabinetry, kitchen and bath installations, and exterior landscaping.
Then make a schedule of homebuilding steps that correspond with loan disbursements. Certain percentages of your loan will be paid as a “draw” as the work progresses. The number of draws and percentages varies among both lenders and log home manufacturers, so be sure to ask for help from both of those parties as well as your general contractor to map everything out upfront, so you’ll have a workable plan with fewer surprises.
eLoghomes is a proud member of the National Association of Home Builders (NAHB).
For more information on how to choose a log-friendly lender, check out this link:
How to choose a log friendly lender -NAHB