It’s no secret that securing a loan for any purchase has gotten a bit more complicated. Where just a few years ago lenders were willing to shell out big bucks to pretty much any credit-worthy individual, the real estate market slide, sub-prime lending issues, and the credit crunch have made getting a loan a bit more difficult. Factor in the notion that a log home is usually considered a “nontraditional” property, by lending standards, and it’s easy to see the value of a well-researched financing strategy.
The good news, says Bill Medley, vice president, market segments, at Farm Credit Services of Mid-America in Louisville, Kentucky, is that borrowers with sound credit who use proper planning “will find no more difficulty obtaining a mortgage today than they did several years ago.” Customers with weaker financial positions, or who want to borrow a very high percentage of the loan, however, could face considerable challenges.
Where log homes differ from traditional structures, according to Medley, lies mostly in the property itself. “Log home owners want room to breathe, and they want pretty vistas where they’re not looking immediately into the house next door,” says Medley. “That means acreage, which can be another challenge in today’s market.” Many secondary market lenders are more restrictive on larger tracts, he says, noting that Farm Credit is “used to rural properties and acreage so that’s not too much of a limiting factor for us.”
The fact that home values have fallen across the country doesn’t make the financing process any easier for log home buyers, who now have to deal with appraisers who tend to be “more conservative” on values than their predecessors. “In today’s real estate market, its not inconceivable that a house you just built for $250,000 could actually end up at an appraised value of something less,” says Medley. “It happens.”
At American Log Mortgage in Mountville, Pennsylvania, Greg Ebersole, production manager, says the state of the market and the lending environment have both impacted log home buyers. “Right now, down payments are the biggest issue,” states Ebersole. “We are currently lending up to 75 percent of the home’s appraised value, which means the borrower has to have 25 percent in cash and land equity, to get financed.”
Finally, Ebersole says buyers should also consider the amount of time it takes to build a log home. With 12 months being the average time span, many events can occur between the actual financing commitment and the home’s completion date. “In the current financing environment, lenders are apprehensive about what can happen to property values during that one-year period,” Ebersole explains. “Investors are requiring that appraisals can’t be older than 120 days at the time the loan is sold to the investor.”
The 120-day requirement can pose significant challenges for the log home buyer who has an appraisal completed 1-2 months before closing, and then has to wait 12 months for his or her home to be completed. “That would put the buyer at 14 months, and would require a new appraisal,” says Ebersole, whose organization circumvents the issue by setting loan-to-value ratios at a rate that would offset a possible decrease in value.
Your Role in the Process
Borrowers can do their part in ensuring a smooth closing process by making sure credit scores meet current lending standards, and that debt-to-income ratios (the percentage of your monthly gross income that goes toward paying debts) are favorable. “Make sure you minimize your credit card balances,” says Ebersole, “and try to avoid making large purchases at the same time that you want to build a new home.”
Medley concurs, and says a sound credit history is of utmost importance for homebuyers right now, and can be achieved by “paying your bills on time” and not overleveraging your debt. Make sure there are no gaps in your credit history, he adds, and be ready to explain any “dings” on your credit rating (such as an illness or divorce). Finally, as Ebersole also pointed out, expect to put out at least 20 to 25 percent for a down payment.
“On the whole, down payment requirements for log homes are a bit more conservative,” says Medley. To buyers looking to jump through as few hoops as possible on their way to getting their log homes financed, Medley says: Do your homework. “Talk to someone who’s already been through the experience. Log home owners usually love their properties and love to talk with others,” he advises. “Read about the industry. The publications are almost always full of good information and advice, about styles, building trends, and all sorts of information. Be a sponge; it’ll pay you back in the long run.”
Here are nine quick strategies that the Log Homes Council advises all consumers to use when shopping for a loan:
1. Compare and Contrast Lending Programs: You can start with your local bank on Main Street, as well as with regional or national lenders. You can also sign up with referral websites to receive information from scores of lenders competing for your business.
2. Consider the Construction-Permanent Loan Option: The most desirable loan to obtain is a one-close, construction-permanent loan.
3. Look at How Construction Loans Differ From Mortgages: Construction loan payments are typically interest-only payments, with interest assessed monthly on the outstanding loan balance. This poses a greater risk for the lender, which is why there is a higher interest rate. Conventional loans are secured by home and land, with loan amounts based on the appraised value of a home checked against the selling price of nearby homes.
4. Seek Out Log Lending Experience: Shop for lenders that have experience with log homes. If you are working with a local builder/dealer representative, they can often recommend lenders they have worked with in the past.
5. Shoot for a Fair Appraisal: Lenders without log home experience will assume they have to find comparable sales of other log homes within a 10-15 mile radius. Since log homes are rarely sold (homeowners tend to make these their last home, then bequeath them to their relatives), this can be problematic for the lender.
6. Investigate Construction Terms and Schedule: Iron out a construction schedule with your builder, including a start and completion date. This will be important when shopping for a lender, specifically when it comes to the terms and scheduling of the construction portion of the loan.
7. Develop a Solid “Draw” Schedule: Construction loans are paid out in a series of payments or “draws.” The draw schedule lists work
that must be completed for each payment. An inspector hired by the bank will visit the job site to verify that the necessary work is completed before issuing a draw check.
8. Ask for a Good Faith Estimate: Find the best deal by asking for a good faith estimate of all fees and closing costs from each lender you are considering. While the ultimate cost may not be exactly 100 percent of that good faith estimate, it shouldn’t be dramatically different.
9. Have Contingency Funds: Most lenders advise buyers to set aside a contingency fund of 10 percent of the cost of the project to cover unforeseen expenses.