Your budget affects each and every aspect of your home, starting from the size to the amenities and also the location. With a dollar figure in mind, you should start planning and designing the log cabins. Building a log cabin from scratch is much different from buying an existing home. You can cut down on costs by checking out the tiny log cabins for sale online. Builders offer high-quality tiny cabins for sale, but many don’t offer to finance. At TinyHouseMe, you connect with established builders offering affordable, premium-quality log cabins.
Moreover, TinyHouseMe offers expert assistance to plan and finance your log cabin. We know that log homes are a significant investment, and you will want to consider financing solutions to find out what works best for you. This write-up focuses on financing for a customized log home and how to make things easier for you to get the loan required to build the home.
You will need two loans
If you are eyeing the tiny log cabins for sale but need financial help, apply for two loans before your dream becomes a reality. The 1st loan is the construction loan that provides you the money for paying the bills during the log cabin construction process. The 2nd loan is the standard 15-to-30-year mortgage loan. Both loans are necessary for financing the log home that you build yourself or getting the structure built on your land, as they have different collateral needs than financing an existing home.
Financing an existing home is easy as the bank determines the valuation of the home and agrees to lend a percentage of the value as a mortgage. The home serves as collateral for the mortgage and secures the loan if you fail to meet the terms of the mortgage.
However, financing a log cabin built from scratch is complex as you have no existing home that can serve as collateral. At that time, the loan officers need your other assets for collateral. You need to provide more details about your personal finances and home construction. The other assets that can serve as collateral are your personal property like bonds, stocks, cash in a savings account, or a bank agreement to grant a mortgage loan once the log cabin is completed.
Mortgage Loan
This loan is quite common for most families. However, you need to know the personal and financial information required and how to pre-qualify yourself before you apply for the loan.
Lenders insist that you make some down payment for the log home before they grant the long-term mortgage. As per NAHB, lenders prefer at least a 20% down payment from the owner and will offer better terms and conditions for inducing you to do so! If you can only offer a small percentage of the down payment on the home, then the loans require mortgage insurance to reduce the risk to the bank.
Other factors, like the ratio between your income and the mortgage payment and between your income and total longstanding debt, are considered before making a mortgage loan. As per Log & Timber Home Living Magazine, these ratios vary from person to person, but banks require your expected monthly mortgage payment not to be more than 28% of your monthly gross family income. However, this percentage depends on your down payment and financial situation.
The second ratio lenders consider the ratio of your installment debt payment per month which includes the mortgage payment and the monthly gross income of your family. According to Log & Timber Home Living Magazine, this ratio cannot exceed 36%.
There are other factors banks consider before making a mortgage loan, and the above information is just a basic guide that the banks follow for determining your borrowing capacity. After you have qualified for the mortgage loan, the bank will issue a letter to indicate that the construction loan should be paid off with the proceeds of the mortgage loan. With the take-out letter, you can now apply for the construction loan.
Construction Loan
This is a short-term loan and is separate from a mortgage loan. The purpose of this loan is to pay for the labor and materials required to build the log home. As per, The Weatherall Company, these loans are for 6 to 18 months and have higher interest rates as they are riskier than other secured loans. These loans are for both professional and DIY builders. However, before approving the loan, bankers study the project, and a decision is made after proper evaluation. The take-out letter assures the bank that you have qualified for the mortgage loan, which will be repaid from the proceeds of the mortgage loan after the construction has been completed.
The construction loan funds are not credited to your account but are released in exchange for proof of labor and materials used to build the log cabin. In addition, on-site inspections are conducted, and the loans are released at specific points of the building process.
Package Financing
Log home producers need a sustainable amount of the loan in advance to purchase the package for cutting and delivery. Some lending institutions release the funds after you and the manufacturer place a request. However, some banks refuse until the package is present on the lot. At this point, ask the bank to issue a promissory note or a ‘letter of credit’ to the log home producer guaranteeing payment upon delivery. Often the bank transfers the money directly to the producer’s account the same day the log package is delivered. Your builder-dealer will help you arrange with the bank and the log home producer to make the financing of the log packages easier and more convenient.
How to choose a log-friendly lender?
- Look for lenders with experience with log homes
- A local builder can help you connect with the lenders they have worked with before
- The local builder can help you prepare the building documents the lender will need
What do you need to qualify for a loan?
- 700+ credit score (as per NAHB)
- Pension award letter or your social security
- Two months of complete bank statements on every page
- An estimated contract of the log home plan for justifying the amount being borrowed
- Mortgage statement of your home and other additional properties owned by you
- Explanatory letter for negative credit (if applicable)
Besides your financial status, lenders also need to know things like:
- Sales contract for the log home package – Complete set of bills
- Building permits – Construction documents that comply with building codes
- Plans and specifications – Construction drawings
- Cost estimates – Copies of written bids
- Builder Contract – Agreement showing costs and specifications
- Survey or plot plan – Location and legal description of your property
- Land deed – Title and mortgage details of the property you intend to build
Final Words
As per Log & Timber Home Living Magazine, tiny log homes account for over 6% of all custom-built family homes in the USA. However, financing a log home is challenging, and this write-up focuses on making things easier for you. TinyHouseMe connects you with builders offering tiny log cabins for sale and assists with expert help to plan and finance your home. Enroll now! Book an appointment with the right builder today to get started at the earliest.
