Log Home Mortgage

Consider obtaining an appraisal from an independent appraisal on the land before you sign the contract. This may ensure you’re paying a fair market price for the land. A piece of land that is too large or too expensive for the area can be difficult to finance. Make sure you work with a bank that can finance raw land, and is comfortable with log homes.

Develop a budget allowance for your project. Get prequalified or preapproved for the mortgage necessary to complete your project. Consider applying for 10% more than you think you need. Upgrades and overruns are common, and you don’t want to run out of money.

Building a log home from scratch is quite different from buying an existing home. Make sure you work with a lender who has some experience with construction lending and log home lending in particular. A good construction lender will review your financing options and steer you clear of common pitfalls.

How does a construction loan work?

The construction portion of a construction/perm loan works in stages. The contractor, buyer and bank agree to a schedule of ‘draws’ in advance. A draw is payment for completion of a portion of the work. A typical draw schedule looks like this:

First Draw on completion of the home's foundation.

Second Draw on completion of a weathertight house shell.

Third Draw on installation of electrical, plumbing and HVAC systems.

Fourth Draw on completion of interior finish and trim and installation of appliances and bathroom fixtures.

Fifth Draw on completion of house, building and loan inspections.

Sixth Draw about 90 days after completion or after sufficient time for the filing of mechanics' liens.

You only pay interest on the amount drawn. The bank will typically require an independent inspection of the work progress before payment of each draw. This protects you, the builder and the bank.

The construction of a log home presents different situation to the bank. You need to make sure that the bank will pay the log manufacturer for the log kit. This can get sticky, because $25,000 to $50,000 or more for a log kit that will be dropped at your homesite gets a banker’s stomach churning. That’s why it’s very important to work with a bank that specializes in log lending.

You can calculate your monthly payment with this calculator.

The best structure is a Construction/Permanent Loan

This structure is called a 'one-step' or 'single close' loan. A lender provides both the construction financing and permanent financing in a single loan.

During the construction phase, periodic draw payments are made to the builder based upon work completed. Monthly interest payments are made to the lender.

At completion, the loan modifies to a permanent loan. The construction interest rate and permanent loan rate can usually be locked in to protect the buyer from increases in interest rates during construction. Be sure to find a lender that has experience with this type of financing.

The single-close structure has the following advantages:

A single lender is used throughout the process.

There may be local and federal tax advantages of a single step loan.

Closing costs duplication is minimized.

The interest rate during construction and the permanent loan rate can be locked.

The principal disadvantages are:

There are fewer lenders providing this type of financing.

Make sure the lender is experienced with the single step close loan. If the lender does not have the expertise, then the process may be time-consuming and unnecessarily complex.

Interest must be paid during construction; if you have a house to sell, this could result in cash flow strains during the construction period. (A few lenders offer a no interest payment during construction option, which eliminates this issue.)

Another possibility is a separate Construction Loan and a separate Permanent Loan

This structure is called a 'two-step' or 'two close' loan. A local bank typically provides the construction financing with periodic draws. Monthly interest payments are made to the bank.

At completion, a 'take-out' permanent loan is obtained from the bank or a mortgage broker.The two-step structure is commonly available and widely used. The principal disadvantages are:

There are two sets of closing costs (usually title insurance, documentation and loan fees).

Transfer or stamp taxes are not minimized.

Construction cannot begin until all requirements for the take-out financing are completed.