I would love to state, flat out, that banks love to finance log homes. To those of us in the industry, that would make our lives a lot easier. After all, most of our customers cannot build without a reliable source of construction funding.
Unfortunately that is not always the case. Financing the sale or construction of a log home requires a bit more flexibility on the part of the lender. While many banks will provide the financing needed, the process requires a good relationship with the loan officer and good communication throughout the process. The key is finding the right bank, ideally close to your building site, which is willing to work closely with the buyer to make the project go forward. Here are a few things to consider when it comes to financing a log home.
Log Home Construction Loans
A construction loan describes the type of loan given by a bank to finance a home building project. Before receiving a log home construction loan, the buyer and builder must first cost out the entire project and present those estimates to the bank for their approval. Funds released from a construction loan are not given out all at once. Instead, the bank pays money from a construction loan a little bit at a time as work on the project is completed.
A construction loan works for the buyer because he pays interest on only the money that has been drawn from the loan, and not on the entire amount to be borrowed. The builder likes it because he gets paid regularly as his work is done. And the bank is satisfied knowing that the money it has paid out is not greater than the value of what has been completed so far.
Before a bank will finance the purchase or construction of a log home, it must first determine the home’s market value. The bank will hire a professional appraiser to evaluate the home and determine its worth based on the real estate market in your area. To do this, the bank will consider the size of the home as well as the unique features. A 2500 square foot home with cathedral ceilings, hardwood floors and a custom kitchen will bring a different value than a smaller home with more standard features.
Next the bank appraiser will review recent home sales in the area to find the home’s potential resale value. To do this, he will be looking for homes with similar features knowing that the market value of the purchased home should be comparable to the value of those homes which have recently sold. This will give him the most accurate and up to date snapshot of the home’s current worth.
Comps can be a problem for log homes. True, it may not be difficult to find homes with comparable features. However, finding them in a log home can be next to impossible. Especially a log home that may have sold within the past few months.
Part of the problem with this is that people tend to keep their log homes for a longer period of time. For many people that build log homes, it won’t be their first home, but it hopefully will be their last. Because the log home is so unique, instead of being a transitional home, it is more likely the final home. Therefore there are fewer log home re-sales for the appraiser to use for comparison.
Not having a recent log home resale makes the appraisal process more difficult. It’s not a deal breaker. Generally appraisers will do their best to compare with whatever home re-sales are available to him. However, another log home is preferred.
For new home construction, another difficulty with log home financing is the need for what is known as a curbside payment. When the ready-to-assemble log home package is delivered to the building site, the log home producer would like to be paid for the full value of the materials. The bank doesn’t like this. It would prefer to wait until after assembly. To them it is simply a pile of logs, windows and other material until it is erected by the builder.
The problem is this. The bank wants the money that it has paid into a home construction project to be no more than the home would be worth if something were to happen to stop construction. Plus, they want to be sure that the log home package does in fact get built. For this reason, it much safer for them to pay after the package is constructed.
There are a few ways to get past this. If the customer can raise the funds on his own, he can pay for the delivered package and have the bank reimburse him after the kit is assembled.
A more common solution is to use preexisting equity in the property. If the building site is owned outright, the buyer’s equity in the land should be enough to cover the cost of the log home package. The bank can pay for the log home package as a way of reimbursing the customer for the value of his land.
Finally, if the bank has a good relationship with the log home builder, it may have the confidence to make the log home payment upon delivery, knowing that the builder’s history of reliability. This is a good reason to use a log home builder with local experience and a good reputation.
Start your Research Early
Here are a few other points to consider. Be sure to meet with the banker as early as possible in the process. Get prequalified and educate yourself as to how the entire process works. Get together a checklist of exactly what the bank needs to move forward with the application and closing process.
If you are building a home, make sure you borrow enough money, and then some. There are always unexpected costs. And it is better to have money to spare than to have to go back for more. Construction money left over can be used to pay down the total loan amount before the final closing.
Log homes are right now as popular as ever. And many banks recognize that log home financing can be a good niche for their business. Our experience is that log home customers are generally high equity, low debt buyers, especially if they own a building site. For the bank, this is the ideal customer!