A myriad of decisions have to be made to bring the dream of a log, timber, or hybrid home to life. Style, floorplan, amenities, and location are a few that come readily to mind. The most challenging for many homeowners, however, comes down to the money. Financing a log or timber home holds a degree of mystery, an element of the unknown, and often enough it is a topic of real concern. Certain misconceptions and downright myths persist that financing of a specialty home is more difficult than financing a conventional home.
Information is power when it comes to the financing game, and experts are ready to assist in making the process easier. Understanding the various elements of financing will provide a sound basis for asking the right questions and making informed decisions. After all, financing a home is typically an experience that occurs once or twice in a lifetime. Common questions surround the dollar amount that may be borrowed, the term of the loan, the interest rate charged, the monthly payment, and the associated closing costs. Each of these will vary based on the personal finances of the borrower, including income and existing debt requirements, long-range plans, and market conditions at the time of application.
Greg Ebersole of BB&T Home Mortgage in Lancaster, Pennsylvania, says, “Today the most important step is to get prequalified to ensure that the client plans from the start a home that is within their budget and has the necessary down payment available.”
Working with a lender that is familiar with financing log and timber homes will speed the application process along. “Have all of your financial information ready, including tax returns, pay stubs, and bank statements,” advises Andrew West, vice president and wealth management adviser for Mounier, Larson, West & Gasparini Group in Rockford, Illinois. “The lender will take an application and begin underwriting. The more organized you are, the better. You have to be employed and have assets and be able to prove you can pay the loan back. You need to demonstrate that you are a good saver and don’t have a lot of debt. Cash is important in construction because you need to be able to pay for something unforeseen such as running into rock that would make digging the foundation more expensive than originally planned.”
Certain lenders will provide construction financing on a short-term basis only, typically allowing six months to a year to complete the project; however, construction-permanent loans that involve a single closing and simple conversion to permanent financing are available, eliminating the need for more than one loan and a second closing.
Work with a log, timber frame, or hybrid home company and builder to finalize costs and develop that key relationship early in the process. Determine those aspects of the home that are “musts” versus “wants.” Each of these will influence the overall cost of the project.
“What size home fits well on your balance sheet as a financial item?” adds West. “Knowing that in advance gives you confidence in the design and how much you can spend. Builders and others will want to know what your budget is, so keeping it a secret is silly. Definitely have someone in the process you can trust and say, ‘This is what really works for us financially.’”
Most lenders will offer standard options of up to 30-year terms and a loan amount of up to 80 percent of the appraised value or sale price of the home, whichever is lower. In the case of construction, loan to value is often restricted to 75 percent due to the additional risk of the construction period.
Troy Kennedy of Wells Fargo Home Mortgage in La Jolla, California, notes, “After getting a preliminary preapproval, the borrower delivers information including plans and contracts with the log or timber provider and the general contractor along with documentation on income and assets. With construction loans, the builder is qualified and then counseled on the draw process. An appraisal is received, and final numbers are determined. Loans gain final approval and generally close in approximately four to six weeks.”
Actual construction should never commence prior to closing and the issuance of a title insurance commitment to prevent problems with prior liens. Deal with qualified professionals. An experienced lender and licensed general contractor will ease the completion of details such as permitting and coordinating subcontractors and materials.
Each of these basic steps in the financing process involves attention to detail and awareness of some potential pitfalls. For example, borrowers are evaluated on the basis of their cash flow cushion, or ability to repay a loan based on income and expenses. A strong credit history and stable income are essential. Appraisal value dictates the actual dollar amount of a loan. So, while a borrower may be able to repay a larger loan, the amount borrowed is restricted by the appraised value of the property. During prequalifying and final approval, self-employed borrowers are limited to the adjusted gross income reported on their tax returns. So-called low-doc or no-doc loan programs were once readily available but are now less common.
“Some lenders may have higher credit score requirements for construction loans in order to qualify,” notes Ebersole. “Others may lend at lower loan to value due to unfamiliarity with log homes. It comes down to finding a lender who has a comfort level with these types of homes. Some lenders may charge a higher rate because of their inexperience in handling log, timber frame, or hybrid homes, but if the client is working with a log- or timber home-friendly lender this is not true.”
While the processes of financing conventional and log, timber frame, and hybrid homes share similarities, securing a loan for a specialty home has some requirements and nuances all its own. “There are only two major differences,” explains Kennedy. “Otherwise, the products and the process are exactly the same. First is the prepayment of log, timber frame, or hybrid home packages for construction projects. Most manufacturers require that 50 percent of the package be paid for up front prior to manufacturing and that the remaining 50 percent be paid upon delivery to the job site. This differs from a conventional home where draws cannot be paid for materials until the house is fully framed on site.”
West agrees. “The construction department at a bank has a standard procedure for disbursements of funds, and on conventional construction loans draws are made as the home is being completed. In log, timber frame, and hybrid homes you’ve got a lot of cost before the product arrives, and since the log or timber company is cutting a project for you they will want 50 percent of their cost paid before they turn the saw on. So, it is best to determine if your bank is experienced in log, timber frame, and hybrid home financing and willing to work on such a basis. This means asking the question, ‘Are you willing to disburse money when I say so and not when the bank says so?’”
The second major difference with specialty home financing, relates Kennedy, involves the appraisal process. “Conventional appraisals require similar properties sold within a very short distance and within a very short time—typically within the last year. Log, timber frame, and hybrid home appraisals have to be more flexible to go farther out in distance and farther back in time. Also, appraisers need to recognize that there may not be many such comparable sales and allow custom-built conventional homes to be used in the appraisal.”
Another factor that significantly influences the outcome of an appraisal involves the homeowner’s plan itself. When the decision is made to build a log, timber frame, or hybrid home with financing involved, buyers should consult with their team of professionals, including the builder, architect, and interior designer to determine that the home fits the profile of the development or other anticipated location. Consider the size, style, and cost of other homes within a radius of several miles. Is the contemplated project similar in cost and style? If not, there may be concerns with appraisal and resale values.
Consider whether the project is overbuilt or underbuilt for the area. If so, the appraisal value will be adversely affected. A timber frame home constructed in proximity to other timber frame homes of similar size and with comparable amenities should, however, appraise well.
Bearing these basic concerns in mind, the process for financing a log, timber frame, or hybrid home is similar to that of a conventional home. For more information about financing a log, timber frame, or hybrid home, visit www.logcabins.com.