The Log Cabin

Wednesday, May 12, 2010

Log Cabin Financing

Now is the time to build. The economy is still shaky, housing manufacturers are hungry for business, delivery lead times have come down and interest rates are low. Keep in mind, however, that log cabins are still different. Finding financing for them requires some extra diligence. Here are some tips.

Find lenders with log cabin financing experience. Don’t go down the road with an inexperienced bank only to discover insurmountable roadblocks. Your builder and/or manufacturer should be able to make recommendations based on their customer experience. Find out what problems other borrowers have run into. Ask prospective lenders what issues may arise that could cause a problem.

One common drawback of a log cabin is finding comps for the appraisal. Log cabins turn over much less frequently than traditional houses and there are fewer of them to begin with. There may be insufficient comps in the vicinity for determining appraisal value. Experienced log cabin lenders can usually overcome this problem.

If you are building a new log cabin as is often the case, construction loans will also be a consideration. The ideal structure is where the construction financing automatically rolls into a long term mortgage upon completion with the same lender. This minimizes closing costs and the need to deal with two separate institutions. The construction lender is secured by the value of the land and is more risky for the lender. Payments will consist of interest only.

The time frame for the construction is not always controllable so the longer the better. Keep in mind that log home manufacturers will expect full payment upon delivery of their materials. If the lender sells the mortgage to Freddie Mac, due to real estate market volatility (to the downside), there is a 120 day construction limit before a new appraisal must confirm the value of the property.

You will develop a construction schedule with your builder but always expect the unexpected. You should be prepared with contingency funds for those unexpected costs. A good example is someone I know who was building a new home and had agreed to a price with his builder. They immediately hit rock ledge upon excavation and his ‘cost plus’ fee took a significant bump up.

Local lenders with local access and decision makers are desirable but not necessary. You will need to develop your priorities, research your alternatives including the rates and closing costs for each lender. The lowest cost is not necessarily the best deal. There will always be tradeoffs.

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