Building a log home is the number-one dream of many people’s lifetime. Oddly enough, paying for it ranks substantially lower on the list. It’s not just the money itself, but rather all of the complicated calculations, details and decisions associated with what will likely be the most expensive purchase you’ll ever make. No wonder people would rather spend so much more time learning about the wonders of the building process and investigating finish materials instead of wading through paperwork and playing with calculators.
Who wants to deal with the petty, ugly details of financing? Let’s face it. We want to enjoy all the fun of a fantastic dinner at a fancy restaurant, but does anyone really look forward to picking up the check? Well, have no fear. I have put together a tip sheet that outlines some of the basic issues related to financing the project. It is by no means the be-all and end-all for everything you will need to know to manage your project financially, but it will serve as a quick reference to make sure you have addressed the major issues of financing your dream home.
• Assessing Your Financial Situation. No need to go into this project with your eyes closed. This is the time to make sure you have all of your finances in order and determine your fiscal limits. Check below to make sure you have prepared yourself for all of the expenses and requirements coming your way.
Cash. This is the most important commodity in any building project. You need to hoard your cash throughout the project. Now is the time to tap equity lines and hike your savings. The banks will want to see plenty of this at each stage of financing, and you will need cash for deposits and running the project. The amount can vary, but if you are working with less than 20 percent of your project cost in liquidity you may have some hard times ahead.
Credit. It’s all about the score. Credit scoring today can make or break your ability to finance your home. If your score is 700-plus, you have lots of options; 699 and below is still fundable, but programs may be limited or more expensive. Start boosting your score today. Make sure you are paying your bills on time. If you have some scratches, call, beg and plead to get them straightened out. Keep those credit card balances low. High credit card balances are the most common score reducers. Lastly, don’t run your credit any more then necessary. Unneeded inquiry can cost you points as well.
Payment. With today’s abundance of no-income-qualification loan programs, payments are now more an issue of affordability rather than a deciding factor in getting a loan. This means that you need to be more diligent about determining how much you can afford. Make sure you consider all of the issues, including tax deduction and having diversified investments. Often, a slightly higher payment and more liquidity is a better route to protect you in case of job loss or other financial catastrophes.
• Buying Land. What good is a house without land to put it on? Not every piece of land is worth the asking price, and sometimes the value is determined more by the home you choose to put on it. Make sure you address these issues before plunking down your hard-earned money on some dirt.
Choosing a lot. Certain types of land are easier to finance than others. Many people love the idea of open space, but lots over 20 acres are often shunned by institutional lenders. Make sure the utilities are nearby. Lots without electricity or that are “off the grid” are nearly impossible to finance, as are the homes on them. Septic systems and wells can be acceptable, but make sure they are adequate to meet county guidelines for building.
Getting a loan. The good news is that the days of having to buy land either with all cash or 50 percent down are gone. There are plenty of lenders out there offering financing with as little as 10 percent down and often without the need for tax-returns or other income documentation. One caveat, however, is that often these lenders are the same ones offering construction loans, so the income information you provide will need to be consistent for both loans.
Pay careful attention to the term of the loan as well. A two-year loan may seem long enough for plans and permits, but the process can often go longer, and there are few lenders offering refinancing on land. Lastly, remember to hoard your cash. No lender cares if you pay off your land, so don’t. Lenders want to see money in the bank.
• Designing the Home. Now comes the fun part. This is your chance to design the home that fits you best. There are many log-home companies to choose from. Luckily, most will customize their plans to fit your desire. While they offer a variety of engineering techniques and financial structures, the important thing is for you to pick a company where you like and trust the people you are dealing with. Find the company you believe will stand behind its product and support you before, during and after the home is built. Here are a couple of other things to consider during the design process.
Go for marketability. Of course, one of the attractions of a custom home is creating your own floor plan and home style. Be aware, however, that stretching too far from the norm can put your hard-earned money at risk. Remember, this will be your home, but you are spending a lot of money. The best way to protect your investment is to be sure you can sell it quickly if you need to. Check out the other houses in the neighborhood to make sure you are neither over-building nor under-building. Try not to create anything so unique that no one else would ever buy it.
Figure all your needs and wants up front. Nothing makes for aggravation in a custom log-home project more than last-minute changes. This is the number-one cause of going over budget. You can avoid changes by making decisions early in the process. Think about all of the different decisions to be made while designing with your log-home dealer. Shop online or at home-improvement stores and pick out all of your fixtures and hardware before you start talking to builders. Giving them all the same model numbers on finish items will ensure that everyone is bidding on the same items.
• Picking a Builder. Your builder is your friend and the caretaker of your dream. Choose carefully, even if you choose yourself. Keep the following points in mind.
Choose your experience. Everyone knows to compare price and to investigate quality when picking a builder, but considering personality is just as important to ensure a good experience. Find the builder that complements the way you work. If you are too busy to be involved in the project, make sure the builder is a take-charge person who will get the job done. On the other hand, if you are going to micro-manage the process, you will need a more laid-back builder, who will enjoy having your involvement. Interview extensively to make sure you have the right fit.
Decide whether to go the owner-builder route. Saving money by eliminating the contractor depends heavily on your skills and connections. If you are an excellent manager and know lots of suppliers and people in the trades, being an owner-builder may be just the thing to inspire the Bob Vila nestled inside you. Don’t forget to value the cost of your own time, however, and be sure you are up to taking on full responsibility for the happiness of your family in their home for years to come.
• Getting a Construction Loan. The number of national lenders offering construction loans for log homes has increased substantially over the last few years. This means that there are more options and programs available. Not all loans are the same, so here are a couple of hints to help you through the financing process.
Rates are less important. The best construction loans today are single-close, meaning the construction loan automatically rolls into the permanent loan. Often, these loans are around prime during construction and then roll to market rate. Since they are similar, the difference between loans has more to do with the amount you can borrow, how you qualify, the need for log home comparables, the disbursement process, etc. Spend a good amount of time learning the details of the different loans so you can compare loans and lenders on an even playing field.
Use the expert. You can’t really afford to make the wrong decisions about financing your project, so it’s important to find the right loan officer to guide you through the lending process. The challenge in today’s market is that many loan officers claiming to be experts aren’t. Nothing beats experience. Find a loan officer that has funded at least 50 construction loans and has handled log homes regularly. Make sure you check references carefully.
• Picking a Permanent Loan. Now that the home is almost done and you’re ready to move in, you are ready to make a decision on final financing. Many of the construction loans today as stated will roll to permanent, but you still have to pick the right program for your needs. Take the issues below into account in your decision-making.
Take the money. More often than not, projects go over budget. You may have finished the house, but more expenses are coming, such as furnishing, decorating, landscaping. Make sure you have taken all the cash afforded to you in your construction loan. You want to avoid the costs of going back to the home to get more money. The rates could be higher, and your qualification situation may change. There can be tax benefits to taking more money at the beginning as well.
How long will you be there? The lenders today offer many loans fixed short term that can save you money. Since amortized loans only reduce principal slightly in the first few years, interest-only options can help reduce your payments without substantial risk if keeping your loan for five to seven years, which is typical for the average family. There are many tax benefits to be had by selling or refinancing every so often. Talk to your accountant and financial planner to learn all the subtle ways to improve your finances with the right permanent mortgage.
• Read and Ask. While this information should be a good reference for you to start assessing your financial responsibilities for a log home project, by no means will it cover everything financial. Make sure you give proper attention and time to learning everything you can from books and experts on the subject. Most important, if you are unclear on a particular issue, speak up and ask the question. This is your home and dream, and you are entitled to a minimum of unpleasant surprises.
Kevin Daum is the author of the custom-home manual Building Your Own Home for Dummies and What the Banks Won’t Tell You: How to Get the Most Out of Your Mortgage.