log home construction financing

by Dean Loux, American Log Mortgage

 

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 log home 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 self-employed 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 a very 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.

 

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. The original appraiser
performs 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.

 

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.

 

For more information, please contact:

Dean Loux

Toll Free: 877-226-5242 ext 6612

americanlogmortgage.com

 

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