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Written by: David Janczak
Founder/Owner of Wisconsin Log Homes
We strongly recommend that you get a mortgage loan commitment before you approach a bank for a construction loan. Since the mortgage loan is the longest and most expensive of the two loans, it's important to concentrate more on comparing mortgage plans than "short term" construction loans.
When you shop for a mortgage loan, you're not only comparing one lender to another, but also the different types of mortgages within each lending institution. Remember, there are many types of mortgage loans, and finding the right one is as important as finding the right floor plan. You have the right to "buy" the best possible financing for your home at the interest that suits your budget.
Make sure you can contribute your part of the paper trail before you set out. Expect to be asked for 2-3 years of income tax returns and a financial statement that lists all of your assets and liabilities. It's also a good idea to get a copy of your credit report from a national reporting agency. Credit reports often contain inaccuracies, and you want to be able to correct them.
Because loan approval is based in part on your credit history, try to make it look as good as possible before the credit check. Lenders generally believe you can afford approximately 36% of your income to be tied up in debt payments, and that includes your house payment. So if your mortgage, insurance, tax and interest payments eat up 28% of your gross income, that only leaves about 8% for other monthly obligations such as loans, credit cards, child care, etc. Try to reduce your credit card bills and put as much cash as you can to raise your bank accounts.
Obviously, you're looking for the lowest interest rate. It sounds simple, but more than likely you'll be comparing apples to oranges because lenders who offer lower interest rates may require higher point fees. Points represent interest you pay up front on your loan. One point is 1% of the amount of the mortgage. Most plans have different rates available, depending upon the number of points you wish to pay.
To ensure that you are getting the mortgage loan you need, ask yourself a few questions. How quickly would you like to repay your loans - within 15, 20 or 30 years? Typically, the sooner you repay your loan, the more money you save in interest payments. However, the longer you extend the term of your financing, the lower your monthly payments may be. In choosing the right loan terms, consider your budget capabilities and long-term spending patterns.
The choices and decisions can be mind-boggling. But many lenders offer free, no obligation pre-qualification. This will show you how your monthly payments and cash requirements will change with various plans. They may even be able to help you restructure your debts to enable you to qualify for a loan. Pre-qualification is designed to save you time and frustration. It will enable you to design a home that fits both your budget and your needs.
The Appraisal
Three key items lenders weigh when evaluating your mortgage loan request are your loan application, credit history, and the appraisal.
Because bankers aren't builders, they hire independent appraisers to help answer questions in this area. These people are supposed to be the experts, but some are less expert than others, particularly when dealing with innovative structures such as super-insulated log homes. Some may have never seen a Wisconsin Log Home.
Ignorance can be a problem. When bankers and appraisers first hear the words "log home," they may have a vision of a little log cabin, one log stacked on top of another with bugs, wind and rain coming through the cracks. You may need to do some educating by showing them the Wisconsin Log Homes website, planning guide, construction manuals and your blue prints. We will also be more than happy to talk with your appraiser or lender to explain our homes and elite building system if needed.
When appraisers are investigating a mortgage, they inspect the house and check selling prices on comparable homes in the neighborhood. It's the same for new construction, except there is no existing house. Instead, the appraisers base their decision on drawings, specifications, contracts and other documents you provide to the lender. In some cases, appraisers will base their decision only on square footage and comparable houses in the neighborhood.
For this reason, we suggest that you meet with the appraiser before he reviews your project. Show him the quality and energy efficiency of our Thermal-Log construction, high-tech Low-E argon windows and insulated doors. Be sure to point out the quality of other amenities you plan to include in your home - maybe a full fieldstone masonry fireplace that's 28 feet high versus a more typical 8-foot high floor to ceiling fireplace.
It's imperative that you point out any wood tongue and groove ceilings, solid wood ceiling beams, wood covered walls and any areas that have high cathedral or vaulted ceilings. It's doubtful that any of the comparable homes in your building area will have such high-quality amenities and architectural details. The cost of such items may be overlooked if you don't bring them to the appraiser's attention. Other items would include your selection of custom stair and railings, thick beamed window and door trim, hardwood flooring, custom cabinetry and other items that add to the value of your home.
Sometimes appraisals are decreased because of the value of the homes in the neighborhood, not the proposed home. The market value of every home is affected by that of its neighbors. Banks are more likely to finance a home in an area dominated by homes of equal or greater value than an area where homes are worth much less. Keep this in mind when deciding where and what to build.
After reviewing this information, the appraiser tells you and the loan officer how much he thinks the home will be worth. Don't panic if the appraiser's estimated value is significantly less than yours. This seems to be the norm, especially when they are dealing with an unfamiliar construction method.
Appraisals can differ greatly because they are just opinions. And you're entitled to get more than one as long as you pay for it. But if two appraisers come up with basically the same value, you'll probably have to make some adjustment. If you have the money, you might want to increase the down payment to reduce the amount you have to borrow from the bank. If this is not an option, you may have to downscale the design or think about adding some of the amenities at a later date. The one thing you don't want to do is reduce the structural quality of your home.
The Draw Schedule
When you discuss the draw schedule with your banker, you'll need to explain the payment terms you have agreed to with your log or timber home producer. Generally, these terms don't fit neatly into the normal draw schedule. Wisconsin Log Homes, like most manufacturers, require a payment with the order, a payment prior to shipping, and final payment when the materials arrive.
Construction draws are made on a specific schedule established by the bank when the loan is approved. There are normally 4 to 6 draws made from a construction loan as follows:
1st Draw: Made upon completion of the foundation
2nd Draw: Follows completion of a weather-tight shell
3rd Draw: After installation of plumbing, heating, electrical and air conditioning
4th Draw: Upon completion of interior finish and trim, the installation of appliances, and kitchen and bathroom fixtures
5th Draw: Follows completion of the house and final inspection
6th Draw: After the expiration of the mechanic's lien period
Draw schedules are set by the banks for their convenience in administering construction loans. But they do make exceptions, and you'll need one to pay for the log home package. Most packages are delivered while the foundation is under construction. You'll need a draw from your loan before anything is actually built on the site. Your loan officer will have to approve draws for work in progress at the log home producer's plant.
Convincing your loan officer to approve a special draw for the home package may require a coordinated effort by the home producer and yourself. Wisconsin Log Homes will be happy to work with your banker.
Thursday, December 16, 2010
Construction Loan for Your Home
Written by: Dave Janczak
Founder/Owner of Wisconsin Log Homes
Financing a home you plan to have built on your land is different from financing a pre-existing home. With a pre-existing home, the banker determines the value of the home through an appraisal and then agrees to lend a percentage of the value to you as a mortgage. The home serves as collateral for the mortgage.
Financing a home you plan to have built on your land is more complex because there is no existing home to serve as collateral. The lender only has the "potential" that when construction is completed, an asset of collateral value will exist. Construction loans are made on the basis of the builder's "potential" to create an asset. Knowing this, it is easy to understand why bankers often are reluctant to make construction loans to people with builders who have no practical building experience.
Construction loans usually cover up to 80 percent of the appraised value of the home and land or 100% of the actual construction cost, whichever is lower. If you already own the land free and clear, it can count toward the down payment for construction. There are generally two different types of construction loans that the banks will provide. The traditional is the standard construction loan where you have two separate closings - the first in the beginning of construction and the second when construction is complete. Most banking institutions also offer a one step construction loan with one closing after construction is complete. After this closing, the loan goes to principle and interest payments.
Unlike mortgage loans, construction loans are released in the form of "draws." The money is paid out by the bank in exchange for proof - usually paid invoices - that labor and materials were used to build the home being financed. In effect, you are being reimbursed for work that is already completed. In most cases, banks will not pay out more than the amount of the bid for the work in question, and will inspect the work to ensure good quality.
When you start to draw on the construction loan, you'll have to make monthly interest payments on the money that actually left the lender. You will also pay fees for inspections, the administration of the loan and payments on draws.
Qualifying for a construction loan is dependent upon, and basically the same as, qualifying for a mortgage. Once the mortgage loan has been approved, bankers normally will go along with a construction loan because they will get their money back when the mortgage loan takes effect.
Getting a mortgage commitment first will save time and money on credit checks, etc.
Before granting either loan, financial institutions want to be sure the money you borrow will be returned in full with interest and at little risk to them. They want to be sure the home is worth at least as much as they have risked. To help secure the loan you will have to provide the following information:
A completed loan application form
A personal financial statement
An employment verification form
A building permit
A sales contract with specific prices
Detailed plans and specifications
Written estimates/bids from contractors
A complete cost estimate sheet
A survey and plot plan
Building department approval document
Title to the land
Information about your log or timber home producer
Cost information on comparable log or timber homes
A statement of your construction abilities if you intend to build yourself
For work you are planning to do yourself, you should still get written estimates from subcontractors for labor and materials so your lender will know the project's full value, and you'll know your labor equity contribution. If something should happen to you, the funds will be there to finish the project. Remember, with a construction loan, you pay interest when the draw is made. So if you plan to stain your home yourself, the value will be there even though you contribute the labor.
These details are necessary. Lenders will not give out thousands of dollars to someone without building experience. Unless you are a contractor, a builder, or have vast experience in the building field, they will not approve the loan because of the risk. The biggest fear of lenders is an uncompleted project worth a quarter of the amount loaned out. They want to invest in professionals who will get the job done right.
Founder/Owner of Wisconsin Log Homes
Financing a home you plan to have built on your land is different from financing a pre-existing home. With a pre-existing home, the banker determines the value of the home through an appraisal and then agrees to lend a percentage of the value to you as a mortgage. The home serves as collateral for the mortgage.
Financing a home you plan to have built on your land is more complex because there is no existing home to serve as collateral. The lender only has the "potential" that when construction is completed, an asset of collateral value will exist. Construction loans are made on the basis of the builder's "potential" to create an asset. Knowing this, it is easy to understand why bankers often are reluctant to make construction loans to people with builders who have no practical building experience.
Construction loans usually cover up to 80 percent of the appraised value of the home and land or 100% of the actual construction cost, whichever is lower. If you already own the land free and clear, it can count toward the down payment for construction. There are generally two different types of construction loans that the banks will provide. The traditional is the standard construction loan where you have two separate closings - the first in the beginning of construction and the second when construction is complete. Most banking institutions also offer a one step construction loan with one closing after construction is complete. After this closing, the loan goes to principle and interest payments.
Unlike mortgage loans, construction loans are released in the form of "draws." The money is paid out by the bank in exchange for proof - usually paid invoices - that labor and materials were used to build the home being financed. In effect, you are being reimbursed for work that is already completed. In most cases, banks will not pay out more than the amount of the bid for the work in question, and will inspect the work to ensure good quality.
When you start to draw on the construction loan, you'll have to make monthly interest payments on the money that actually left the lender. You will also pay fees for inspections, the administration of the loan and payments on draws.
Qualifying for a construction loan is dependent upon, and basically the same as, qualifying for a mortgage. Once the mortgage loan has been approved, bankers normally will go along with a construction loan because they will get their money back when the mortgage loan takes effect.
Getting a mortgage commitment first will save time and money on credit checks, etc.
Before granting either loan, financial institutions want to be sure the money you borrow will be returned in full with interest and at little risk to them. They want to be sure the home is worth at least as much as they have risked. To help secure the loan you will have to provide the following information:
A completed loan application form
A personal financial statement
An employment verification form
A building permit
A sales contract with specific prices
Detailed plans and specifications
Written estimates/bids from contractors
A complete cost estimate sheet
A survey and plot plan
Building department approval document
Title to the land
Information about your log or timber home producer
Cost information on comparable log or timber homes
A statement of your construction abilities if you intend to build yourself
For work you are planning to do yourself, you should still get written estimates from subcontractors for labor and materials so your lender will know the project's full value, and you'll know your labor equity contribution. If something should happen to you, the funds will be there to finish the project. Remember, with a construction loan, you pay interest when the draw is made. So if you plan to stain your home yourself, the value will be there even though you contribute the labor.
These details are necessary. Lenders will not give out thousands of dollars to someone without building experience. Unless you are a contractor, a builder, or have vast experience in the building field, they will not approve the loan because of the risk. The biggest fear of lenders is an uncompleted project worth a quarter of the amount loaned out. They want to invest in professionals who will get the job done right.
Developing a Budget for Your Home
Written by: Dave Janczak
Founder/Owner of Wisconsin Log Homes
Except for a fortunate few, building a dream home usually involves both a construction loan and mortgage loan. Financial consideration can greatly influence the size and style of a new home, so it's best to talk with your banker or financial advisor early in the planning process.
Get a clear idea of how much you want to invest in total and how much the bank is willing to lend you. You'll also need to find out how much of a down payment you can manage and your mortgage limit. You might think you can afford to make a $900 a month payment while your mortgage lender considers $800 more realistic. It's best to fill out a financial statement with your local lender - it doesn't cost anything and will probably take less than an hour. Knowing up front how much money you have to work with will save you a tremendous amount of backtracking, revisions and disappointments in designing a home you can't afford to build.
It's important to be realistic about what you can afford, and design a quality home to fit your budget. Your Wisconsin Log Homes consultant can help you determine what will work best for your needs to keep your home in balance with your budget. Be up front with the people you are working with, and give them a clear idea of your needs and budget. A reputable company will never take advantage of your budget; they use it to direct you in the right direction in creating and building a house that's perfect for you in all respects. One of the biggest mistakes people make is designing too much house for their money because they were hesitant to verbalize what they want to invest. Wisconsin Log Homes takes pride in knowing that we've helped families achieve their dream home, within their budget.
To get an idea of what size house to design, take the money you have budgeted to build your home and divide it by the square foot turn-key construction cost in the area you plan to build. The key is to determine your budget and then find a company who will help you achieve your dream home within your allotted budget.
Founder/Owner of Wisconsin Log Homes
Except for a fortunate few, building a dream home usually involves both a construction loan and mortgage loan. Financial consideration can greatly influence the size and style of a new home, so it's best to talk with your banker or financial advisor early in the planning process.
Get a clear idea of how much you want to invest in total and how much the bank is willing to lend you. You'll also need to find out how much of a down payment you can manage and your mortgage limit. You might think you can afford to make a $900 a month payment while your mortgage lender considers $800 more realistic. It's best to fill out a financial statement with your local lender - it doesn't cost anything and will probably take less than an hour. Knowing up front how much money you have to work with will save you a tremendous amount of backtracking, revisions and disappointments in designing a home you can't afford to build.
It's important to be realistic about what you can afford, and design a quality home to fit your budget. Your Wisconsin Log Homes consultant can help you determine what will work best for your needs to keep your home in balance with your budget. Be up front with the people you are working with, and give them a clear idea of your needs and budget. A reputable company will never take advantage of your budget; they use it to direct you in the right direction in creating and building a house that's perfect for you in all respects. One of the biggest mistakes people make is designing too much house for their money because they were hesitant to verbalize what they want to invest. Wisconsin Log Homes takes pride in knowing that we've helped families achieve their dream home, within their budget.
To get an idea of what size house to design, take the money you have budgeted to build your home and divide it by the square foot turn-key construction cost in the area you plan to build. The key is to determine your budget and then find a company who will help you achieve your dream home within your allotted budget.
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