Luck of the Draw | Loan Scheduling

When you apply for a construction loan, the bank doesn't just hand you a lump sum of money, as it would with a traditional mortgage. Instead, it divides your loan into specific payments, or draws, that are given to you at pre-determined points during the building process. While this makes financing a little more complex, it's actually a good thing. For one, you'll only pay interest on money that's been disbursed, so you won't be charged on the full loan until your project is complete.

"Nobody wants to borrow the full amount up front and start paying on it right away," says Troy Kennedy, who heads the log and timber lending team at Wells Fargo Home Mortgage in Wayzata, Minnesota. "Having different draw times regulates cash flow, and it enables you to pay less interest on the total amount of money being borrowed."

It also helps a project stay on track. Banks will release the next round of funds only once each stage of the project is complete, and they'll send their own inspectors to the site to make sure things are progressing as planned. "The inspector not only signs off on each line item, he looks at the project's percentage of completion, as well," Troy explains. "That's to make sure the build never gets too far out of scale with the amount of funds that are still available to finish it."

Here's how a typical draw schedule works:
The first draw on a loan pays for the log package to be cut and delivered. That's why it's important to work with a lender who's familiar with the log home industry, since traditional lenders might balk at paying for materials before they're in place. The second draw will probably be dependent on the roof's completion, and the bank inspector signing off on it. A third draw may be released when plumbing and electrical systems are installed and a fourth when interior and exterior finishes are complete. The final draw will be dispensed when an occupancy permit is issued.

The money from each draw typically is given directly to your builder, so it's his responsibility to finance construction between each payment. With that said, you can request that your signature is required for each draw, so that your builder won't be paid until you've authorized the release of funds. That way, you'll have leverage if things aren't done to your satisfaction or on your schedule.

Finally, most construction loans have a 12-month time limit before they convert into a permanent mortgage. If construction isn't complete within that time frame, you could be charged a higher interest rate. So make sure the consequences of any unmet deadlines are spelled out up front. "I'd make it crystal clear that the builder pays any penalties incurred by a project going over schedule," says Bob Gammache of Carteret Mortgage in Centreville, Virginia. "That's one of the reasons why you want to have a good feel for your builder before you get started. You want to make sure you're working with someone who will make it a point to get to your next draw on time."

The most important thing to remember is that draw points are really an insurance policy for you, because the bank will keep tabs to make sure your project gets completed on time. This means you'll be able to enjoy your new log home right on schedule.