Log or timber homes can be purchased with cash (nice to have that option) or financed through a lending institution with a mortgage and construction loan.
If you’ve somehow misplaced that winning Powerball ticket, you will probably have to finance that dream home. Formulating your budget and construction schedule can be a daunting task. But that’s why the Log and Timber Homes Council created this Buyer’s Guide, to help consumers make educated decisions when making their dream home a reality. Here are 12 tactics for organizing your finances:
- Use Online Mortgage Calculators
Most lenders have websites that advertise their rates, terms and have mortgage calculators, a few of which are available MortageCalculator.org, BankRate.com and Motrgage-Calc.com. Using these, you can determine a ballpark budget in seconds. To stay accurate and realistic, remember to tally all your assets and liabilities, including your salaries, the value of the land (if you already own it), your investments, any outstanding debt and the value of your existing home if you plan to sell. This important first step will help you set realistic expectations about how much log or timber home you can afford.
- Advertised Rates & Reality
Lenders and banks advertise their services, just like any business. So expect some marketing hype from time to time. While you may hear advertisements touting incredibly low rates, these are known in the financing industry as “teaser rates” — designed to get buyers in the door. You may discover that those were “yesterday’s rates” or that deal requires you to pay so many “points” (a percentage of your loan amount) to earn them.
- Check Your Credit Score
In the new economy and lending environment, your three-digit credit score is hugely important. It will not only determine the interest rate you’ll pay, it will determine if you get a loan. Check your credit report with the three main credit agencies. But only do it once a year (otherwise it can negatively affect your rating). The Federal agencies that buy mortgages from lenders and resell them to investors (Fannie Mae and Freddie Mac) have indicated to lenders that any consumer with a FICO score above 620 is good rating. If you’re in the high 700s (770+), congratulations are in order because you have earned an A+ rating.
- Tactics to Boost Your Credit Score
The average credit score is around 725. What can you do if you are below this number? Credit experts say the way to earn the best credit scores is to have a mix of different credit types, including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans and mortgages). Use your revolving credit lightly — but regularly. Signing up for automatic bill payment will also help your score. Being late on your bills by 30 days or more can make your score drop by as much as 100 points. Make sure you pay all your bills on time. If you do have to carry some debt on a card, make sure it’s not more than 30% of your credit limit. That’s a red flag to many banks and lenders.
- Educate Yourself on Financing Options
When it comes to financing, today you have a bewildering array of different options. But they basically boil down to two kinds: fixed rate and adjustable (some offer a blended version). It’s helpful to have a specific mortgage plan in mind when shopping for a lender, so that you are comparing apples to apples. Most of your initial lender shopping can be done over the phone or the Internet.
- Look for Lenders with Log Home Experience
With conventional construction, the cost of framing of your home is handled through your contractor’s line of credit with the lumberyard. Log home producers, in contrast, need to be paid before they start cutting logs or upon delivery of the home package to your building site. A lender unfamiliar with log and timber home construction may not offer that as an option.
- Land Location and ‘Comps’
Lenders will look at the value of your land, as well as the value of the homes nearby. While log and timber home lend themselves to secluded settings, beware of it being too secluded. That’s because a lender will insist on suitable “comps” or comparable sales within a 10 to 15 mile radius, to gauge the appraised value of your home.
- Fair Appraisals
For a fair appraisal, log and timber homes can be compared to other custom, upscale home sales. However, many appraisers are unfamiliar with this evaluation strategy. This is where a lender who specializes in log and timber home loans will be a big advantage. A way to educate other lenders and appraisers is to alert them to this website. The Log and Timber Homes Council has a white paper on appraising log and timber homes in our library.
- Combining Construction and Mortgage
To save on closing costs, many buyers opt for a one-close construction-permanent loan. The construction portion pays builders, subcontractors and materials suppliers in a series of a half-dozen payments or draws. Once the home is constructed, the loan is automatically rolled into a typical mortgage payment.
Can a buyer roll the cost of land, construction and a permanent mortgage into one loan, with one closing? It’s not very common, but it can be done. However, you would have to be extremely organized. Unless you have all your ducks in a row—such as already selected a home design, know what parcel you want to buy, have chosen a log and timber home manufacturer and a builder — you would be better off going with two loans — one for the land, another for the construction-perm. Most lenders will give you a discount if you do both loans through the same company.
- Financing Terms You Need to Know
- Pre-approved and pre-qualified are not one and the same.
- Pre-qualified means that you have taken your financial information and plugged it into a debt-to-income calculator (available online) and determined the general price range you can afford.
- Pre-approval, in contrast, means that a lender has evaluated your application (which could involve a fee) and agrees that you qualify. A pre-approval letter from the lender informs you the maximum amount it will loan, which loan programs you qualify for, and the interest rates it will offer for different types of loans.
- A pre-approval letter doesn’t mean you have a loan in hand. That’s called a loan commitment, which only happens after the lender approves the home’s design, appraisal, title search, and a host of other details about the project.
- Selling Your Current Home?
The health of your local economy may have an impact on the sales price of your current home. If you are financing this purchase with the sale of an existing home, meet with real estate experts in your market as soon as possible. To determine your budget and construction schedule for your new home, you will need accurate information on what your current home is worth, estimated time it will take to sell and if there are any obstacles that have to be overcome.