Information Lenders Need
Don’t underestimate the value of providing potential lenders with detailed information about yourself and your home-building project when you first approach them for a loan. The bank will want to know exactly what you’re going to build, how much it will cost, how long it will take, who will do various portions of the work and something about your ability to get the job done, on time and within budget. That information will allow the bank to appraise the value of your home and determine how much they will lend you to build it.
In general, the construction loan and the home mortgage will require the same information, so you can prepare one package that will satisfy both lenders if you are getting separate loans. The mortgage lender is more concerned with your employment history, income and financial situation, while the construction lender is more interested in your building plans. Both, however, require the same information to some degree.
Questions Lenders Ask
Lenders want to know if the money loaned will be returned in full with interest and with as little risk to them as possible. To assure themselves that it will be, some or all of the following information must be provided sometime during the loan-processing procedure:
Monthly Family Income. If your spouse will quit work after you move into your new log home, you may not include this income into the total.
Other Income Sources. Include bonuses, dividends, part-time employment or anything that can be considered an income source as reported to the Internal Revenue Service.
Credit History. Most lenders will insist on a credit report, which usually costs $25 to $100 payable at the first meeting. This money is not refundable even if the loan is rejected.
If you are not sure about your credit rating, you can request a credit report on yourself from the local credit bureau. You will be charged the same fee for the report, which under the law has to be submitted to you. If the information on the report is in error or the report needs to be updated, you can work with the credit bureau to make the report current before you apply for a loan.
Tax Returns. Whether you are self-employed or not, the lender will usually want a copy of your federal tax returns for the past two or three years.
Employment History. Longevity at your job is important to lenders. However, there usually is no discrimination if you have made a recent job change or are a newcomer to the work force. Expect lenders to call your employer to verify the information you provide.
Employment Verification Form. A statement by your employer on company letterhead and signed by your superior may be adequate. However, ask the lender before you go to the trouble of producing this letter.
VA Eligibility Certificate or Form DD 214. You will only need these if you are applying for a VA-guaranteed loan.
Your Building Plans
The lender will want an accurate, detailed set of plans and specifications, a cost estimate, a construction schedule and detailed knowledge of how and what you will be building before processing your loan application. The Design and Pre-Constructionsections of this site will help prepare you for this. Information you are likely to need:
Building Permits. Blueprints, designed and drawn to comply with local building codes, will have to be presented to the local building permit office for approval to obtain a building permit.
Sales Contract for the Log Home Package. This should include a complete bill of materials to be supplied by the log home producer.
Plans and Specifications. A floorplan in a producer’s catalog is not enough. Bring working plans, detailed materials specifications and descriptions of building materials. With this information, the loan officer will know exactly what he is being asked to finance and can assess its value.
Complete Cost Estimates. For help preparing a complete cost estimate, we suggest you use the Cost Estimating Worksheet (923 kb file).You will also need copies of the written bids and estimates you used to compile the detailed cost estimate.
Builder Contract. If you are hiring a general contractor to build the home for you, you must have a copy of the agreement showing costs and specifications.
Survey or Plot Plan. This shows the exact location of your land and provides a legal description of the property.
Deed. This document will show title and mortgage information on land where you intend to build.
Statement of Your Construction Abilities. If you intend to do some or all of the work yourself, supply the lender with information on your qualifications–pictures of projects you have completed, if they are available, or other evidence showing you are able to tackle the building of your home.
Information on the Log Home Producer. This can be a copy of its annual report, a catalog, a company brochure, a construction guide, a copy of its listing in the Producers Directory or anything you may have that explains what kind of home and services you are buying.
When applying for loans, personal documents in addition to those listed above may be requested by the lending institution. If applicable, it is wise to have this information handy:
Contract for the sale of the house you currently own, or a real estate agent’s listing agreement for the house.
Deeds, mortgages and lease agreements for any rental property you own.
Your attorney’s name, address and telephone number.
Copies of your builder’s risk, liability and fire insurance policies.
Explanation for any known credit problems or deficiencies.
Separation and divorce decree and child support decree.
A copy of discharge of bankruptcy. Provide a list of all secured and unsecured debts covered by the bankruptcy. Be prepared to explain exactly why the bankruptcy occurred.
Loan Cost Disclosures
Since lending institutions may want all of the above information about you and your building plans, it may be a small comfort to know that they are required to inform you of their fees and charges and provide you with a written estimate of all the closing costs associated with the loan. It is important that you ask your loan officer for this information because these charges can be substantial and may vary greatly among competing lending institutions. Basically, you have the right to know how much you are being charged for the loan and all the services that go with it before you sign on the dotted line.
Shop for Your Loans
Buying mortgage and construction money is almost the same as buying a car. An automobile is a commodity and so is money. An automobile dealership sells cars and the bank or financial institution sells money.
The best source of construction financing may not be a bank at all. Some institutions work exclusively with do-it-yourself home builders. Sometimes credit unions make employee loans for home building projects at very favorable rates.
There are about a half-dozen lending institutions that specialize in making log home loans. Most of these companies regularly advertise in Log Home Living and other log home magazines and some are listed in the Suppliers Directory on this web site.
Don’t overlook any source for this loan. It is a simple and relatively safe loan with a good return, so many institutions are eager to sell one to you.
Also, look for lending institutions that will grant both the long-term mortgage and the construction loans. When you get separate loans at different institutions, you will likely have to pay many of the closing costs, such as application fees, credit reports and so forth, twice. Doing business with a lender that offers both types of loans can save money.
Talk to your builder-dealer or other general contractors to see where they get their construction money. Builders and lenders we talked with suggest you contact at least six local institutions to get the best terms and interest rates.
Pay particular attention to fees, charges for inspections and other fees. These items can vary quite a bit between institutions, and they represent a sizeable charge in most cases.
Typical Loan Charges
Loan charges, or closing costs, vary considerably around the country and even from bank to bank in one city. There is enough money involved to make careful shopping a must. Here is a list of costs and charges you should compare before you buy your loan.
Points. Points are a percentage of the loan amount that the bank will charge for making the loan. Points on a typical loan will be 1 to 5 percent, or $2,000 to $10,000 on a $200,000 loan. The number of points charged for a loan will vary from week to week depending on economic conditions and such things as the prime interest rate and the economic forecasts by the Commerce Department. Points are the bank’s means of ensuring a profit from the loan in case of rapid economic inflation during the term of the loan. Usually, the longer the term of the loan and the lower the interest rate, the more points you will have to pay.
Application Fee. This fee, which can be up to 1 percent of the loan amount, covers the cost for processing the application and other paperwork associated with the loan.
Appraisal. It is standard practice for the bank to employ a licensed appraiser to establish the value of your home before it makes a loan.
Title Insurance. This protects both you and the lender against errors that could be made in the title search.
Legal Fees. To make sure that the title of your land is clear, some type of legal assistance is required. This may be a lawyer or, in some states, an abstract or title company. The fee pays an expert to research deeds and records at the county courthouse and certify that you have a clear title to the property before any loans are made.
Credit Report. Credit bureaus throughout the country keep files on each of us that record our credit history. These reports are a standard check that all lending institution make before lending.
Inspection Fee. This fee will cover the expense of having an experienced home construction inspector check on the progress of your building work and authorize construction loan draws. Some lending institutions charge per inspection; with four to six inspections required, this can be expensive. .
The following costs are not a part of your lender’s charges, but are included here so you will be aware that they must be included in your overall cost of building a new home.
Real Estate Taxes. In some states these taxes must be paid in advance and will be prorated for the portion of the year that you own your home.
Recording Fees. These are usually very minor charges the county levies to file all the paperwork and make it part of the public record.
Survey. The lenders will want a verified legal description of your property. The only certain way to produce this is to have the property surveyed by a professional, registered surveyor.
Again, these fees may vary considerably around the country, and there may be others that are not included here. The lending institution is required to disclose all of its fees to you at the time you apply for the .
Mortgage shopping has become a good bit more complicated because there are so many more types of loans available in today’s marketplace. Here’s what you need to know before you go shopping for a home mortgage.
Down Payment. Lenders would prefer that you have as much of your own money invested in your new home as possible. An 80 percent loan-to-value ratio is a term you’ll hear often. It means that the amount of the loan is 80 percent of the value of the home and property, with the other 20 percent covered by your cash or other equity.
If, on the other hand, you just don’t have a lot of cash in savings or from the sale of another house, or if you have better uses for your money, you can often get a mortgage with as little as 5 percent down, or a debt-to-value ratio of 95 percent.
The squeeze comes when you calculate the monthly payments. The less money you put down, the larger the loan amount and the higher the monthly payments will be. It’s a juggling routine between the costs of the home, the down payment and the monthly payments. Your income, the cost of the home you want to build, and the terms your bank requires are the factors you will juggle to see what you can afford.
Types of Mortgages. Not so long ago, about the only home financing available was a long-term mortgage that had a fixed rate. That is, you borrowed money for 15 to 30 years at a set interest rate. The monthly payments of principal and interest were constant throughout the term of the loan, and it was plain whether or not you could afford it.
During the period of extremely high interest rates in the mid 1980s, mortgage lenders had to invent a whole new set of mortgage instruments to meet market demands. The new mortgages are flexible, creative and adaptable to meet most needs. Here are the major types, even though not all are useful in today’s marketplace:
Fixed-Rate Mortgages. These are the standard loans with fixed interest rates and payments that won’t change for the entire term of the loan–usually 30 years.
Fixed-Rate Buy-Downs. When interest rates are high, it is possible to buy down the rate on a fixed-rate mortgage. A lump sum of money is paid to the lender at the outset in exchange for a lower interest rate. The amount is pegged to a percentage of the loan amount, say 5 percent, or five points.
Adjustable-Rate Mortgages (ARM). This mortgage product has an interest rate that changes over the years. The plan was approved in 1981 during a period of high interest rates to help applicants qualify for home loans. The loans are offered at a rate lower than fixed-rate loans; however, at certain intervals determined by the lender, the rates and the monthly payments change.
If you’re considering an ARM, you’ll need to know the caps and the index. The caps are limits on how much the interest rate can vary, both each year and over the life of the loan.
A typical cap might be 2 percent a year and 4 percent for the duration of the loan. For instance, a 30-year ARM made at 7 percent interest with these caps could never exceed 11 percent or fall below 3 percent.
These loans are suited to first-time home buyers who expect to see increased income during the next few years. The bank is protected against rising interest rates while you take some risk that rates will increase. Of course, you benefit if rates should go down.
Graduated-Payment Mortgages (GPM). The basic GPM features payments that increase over a five- or 10-year period. Designed primarily to help young, first-time buyers with rising income, the loans are more expensive than other type loans in the long run. The payments during the first few years cover interest only and the unpaid principal is added to the loan balance in a maneuver called negative amortization. This increases the total payback over the life of the loan.
This type mortgage is a good idea only if rates are excessive and you are certain to have rising income, because the payments will increase, sometimes dramatically, after the initial period. GPM loans are sometimes combined with adjustable interest rates to get a GPM-ARM combination loan that can become quite complicated.