For many log or timber homeowners, the start of a beautiful new life in a log or timber home begins with financing. But even if you’ve financed the purchase of a home before, the process of financing log or timber frame construction is as unique as the homes themselves.
Robert Jones, Executive Vice President of the Federal Savings Bank, has more than 20 years of experience in financing log and timber home projects. Here, he sheds light on the nuances of construction loans.
While the approval process may begin in a similar fashion to that of a conventional mortgage (learn more about what you’ll need to qualify here!), the process begins to vary significantly once a borrower is approved.
“Construction loans usually have a short duration, often from six to 18 months,” explains Robert, “and the materials and labor expenses are paid through periodic disbursements, or draws. These payments are funded following an inspection by a qualified third party who verifies the percentage of completion and authorizes the corresponding funds to be released for payment. This process protects all parties, the bank, the borrower, and the builder.”
During the construction term, draws are often based on a projected schedule, and the borrower pays interest on the funds as they are disbursed. The interest rate is often slightly higher due to the perception of enhanced risk. Log and timber home construction projects typically involve material packages cut and prepared to exact specifications. For this reason, the materials are not interchangeable or returnable. Therefore, the lender typically requires 20 percent cash in the project on the part of the borrower and strongly urges the availability of additional cash resources to fund any alterations from the original cost estimate.
Significant deposits are routinely required to secure the fabrication of the log or timber package, and full payment to the supplier is expected on delivery. Lenders who know the construction process for log and timber homes understand that a large disbursement of loan funding is due at that time. Therein lies the biggest risk of all. The lender has advanced funds on an “unassembled” package that is customized for the specific project. Its relative value through the appraisal is not realized until the assembly is complete. Therefore, choosing a lender with log and timber home experience is critical. (Read more here on finding the right lender for your project!) Your financing partner must understand the basic requirements for the materials package deposit and payment through the draw schedule.
Once the construction project has been completed, a final inspection occurs, verifying that the home has been finished according to the proposed plans and specifications. A short time later, the funding may convert to a permanent loan with monthly payments. Some lenders offer such “construction-to-permanent” programs, while others may actually engage the borrower in a second loan closing to secure the long-term financing to pay off the construction balance and begin normal amortization.
“Finding a lender with experience in the business is a critical aspect of a construction project,” reiterates Robert. “At the Federal Savings Bank, we’re experts in the field of log and timber home construction financing. Making the process function smoothly and taking the mystery and guesswork out of it is our job every day.”
