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:
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.
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 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).
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.
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.
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.
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.
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.
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.
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.
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