|
Log Home Construction Financing
By Doug Groff, Vice President, American Log Mortgage
as published in
International Log Builders’ Association Log Building News
May/June 2005 Issue
The majority of log home lenders today offer what is called a construction-to-permanent
mortgage. This is a construction loan that automatically converts into a final end loan
mortgage, once the new home construction is complete. This method requires the
borrower to have only one loan closing, thus avoiding having to pay for two separate sets
of closing costs.
Following are the steps involved with a construction-to-permanent mortgage:
Loan Application
The lender collects the borrower’s personal financial information at this time. Some of
the items that may need to be collected are W-2’s for the most current 2 years, 1 month’s
current pay stubs, complete signed tax returns for the most current 2 years (if selfemployed
or if rental properties are owned), most recent 2 month’s statements for deposit
accounts (checking, savings, mutual funds, 401K, etc.), and information about the new
home to be built. The lender will also obtain a copy of the borrower’s credit report.
Underwriting
The completed application information is submitted to an underwriter. 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, in
writing, under what requirements the loan is considered approvable. Usually, the
requirements of the loan are called closing conditions.
Closing Conditions
Closing conditions state the documentation that needs to be obtained prior to settling on a
loan. Standard closing conditions include, but are not limited to, the following examples:
an acceptable appraisal, title insurance, source of the funds needed to make the down
payment and closing costs, signed contracts between the borrower and builder/contractor,
and any applicable insurance policies (homeowners/flood).
Appraisal
The appraisal is an extremely 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.
Borrowers can normally submit preliminary plans for appraisal purposes as long
as major changes to the footprint of the home are not made. For example,
changing the square footage, adding a bedroom or bathroom, or deleting a
designated room, is considered a major change. Major changes can alter the
home’s appraised value and can change the loan scenario.
Specifications (Specs)
The specifications are a listing of all of the building materials that are to be used
during the construction process. The specifications will be collected for the
appraiser to assign proper value to the home. Quality and cost of materials can
vary greatly, making specs an important part of the appraisal.
Building Contract
The building contract is a binding agreement between the borrower and the
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 the borrower and 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.
An appraiser will then utilize the above-mentioned information to establish a value for
the new home that is being financed. In order to establish a value, the appraiser will need
to find other homes of similar size and square footage that have been recently resold in
the area in which the new log home is being built. The appraiser will then use the other
homes as comparables to support the value given for the new log home. Some lenders
may require that the appraiser use only log home comparables for the appraisal. Finding
log home comparables may be a challenge in some areas due to the fact that many people
who build log homes do not resell them. They build them as dream homes to be kept and
passed down through generations. This is one area where it may benefit a borrower to
work with a lender that specializes specifically in log home financing. Lenders that
specialize in log homes will normally accept custom and conventionally built homes of
similar size and square footage as comparables if there are no log home comparables
available.
Title Insurance
A local title company or attorney in the borrower’s area prepares and sends the title
insurance to the lender. The title insurance ensures the lender that there are no
outstanding liens on the building lot. The borrower can choose the title company or
attorney that they would like to use.
Initial Settlement
The lender sends the closing agent (title company or attorney) a set of closing instructions
and closing documents. The instructions tell the closing agent how the lender wants the
closing documents to be executed. The closing agent reviews and executes the settlement
documents with the borrower. This is also the time at which the seller of the building lot
will be paid in full and the lot transferred into the borrower’s name (if the borrower does
not already own the lot prior to initial settlement). The documents are then recorded in
the local courthouse prior to sending them back to the lender. After initial settlement, the
construction of the new home can begin.
Construction
This is the time during which the new home is built. During construction, money is
disbursed to the borrower and builder/contractor to fund the building process through
completion. The funds are disbursed according to a disbursement schedule. During
construction, the borrower 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. A local inspector will perform the periodic inspections to determine that
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.
The log package delivery to the building site is one very important aspect of the
disbursement schedule for a log home. Most log home manufacturers require that the log
home package be paid in full when the logs are delivered. Many lenders will not pay for
the logs until they are actually stacked on the foundation. Most lenders that specialize in
log home financing will pay for the log package in full prior to the delivery to the
building site.
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 the borrower is making interest-only payments as funds
are disbursed during construction. This rate is usually locked sometime between
the loan application and initial settlement. The construction rate and term vary
among different lenders.
Permanent Rate
This is the rate of the borrower’s actual end loan mortgage. This rate is normally
locked sometime between loan application and loan modification (the time at
which the new home is complete). The end loan rate and term also vary among
different lenders.
Loan Modification
Modification occurs when the new home construction is complete. This is the process of
converting the construction loan into the permanent (end loan) mortgage. The lender
sends the borrower a modification package to their home. The package includes
documents for the borrower to sign and send back to the lender in order to convert the
construction loan to the final end loan mortgage. It is not necessary for the borrower to
meet with the attorney or title company again for the modification.
Permanent Mortgage
Also known as the end loan. This is the long-term mortgage that is used to repay the
funds that were borrowed as part of the construction loan. Principal, interest, tax and
insurance escrow amounts, and mortgage insurance premiums (if required) are paid by
the borrower on a monthly basis. This is the loan for which the borrower applied and was
approved for in the very beginning of the construction-to-permanent loan process.
# # # #
|
