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It might not be too big of an exaggeration to say that the construction loan
is one of the more daunting aspects of building your custom home. Before
we started our project, I had nightmares about trying to pay two full mortgages
at the same time (our existing mortgage and the construction loan), and I
didn't see how it was at all possible. However, the reality ended up much
more reasonable than I dared hope.
COLLATERAL: Many but not all mortgage companies require you
to own your land first before you apply for the construction loan. That way,
if the borrower defaults, the bank has a way to recoup their investment.
Some banks will let you roll in the land purchase with the construction loan,
but you may have to pay a premium.
TIMING: Your standard construction loan will be based on the one year plan.
It's perfectly reasonable to expect to finish within a year, unless you are
building a handcrafted log home. The good news is that you aren't obligated
for the full construction loan amount from day one. You only have to pay
interest for the amount of money you actually borrow from each draw. So you
won't really be carrying the full mortgage until the end of construction,
at which point you will roll the construction loan over to a conventional
BUDGETING: Before you apply for the construction loan, you must get all your
quotes in order. Banks are not happy about increasing the amount of money
you ask for. Be sure to account for all the sub-contractors (plumbers, masons,
electricians, excavators, landscapers), the well and septic, the windows
and roof, the painters, and even the grass seed. Your mortgage representative
will expect you to have a handle on all your financial needs (see my article
BREAKING DOWN THE BUDGET OF YOUR LOG HOME for more specifics). If some of
these expenses will be out of pocket, it wouldn't hurt to include them in
your construction loan request anyway, so you have a cost overrun buffer.
And get more than one quote if possible, then use the highest quote in the
construction loan request. If you go with the lower quoted job, you'll have
another buffer in your favor.
Before the mortgage company agrees on the loan, they will require a copy
of the floor plan, permits, and survey. Then they will send out an appraiser
who will inspect your property and determine whether your project will appraise
for the amount of money they are committing to. Luckily, more and more banks
are giving log homes a fair appraisal, but it helps to choose a company that
specializes in log homes or your market value may come in too low.
DRAWS: When you've itemized your anticipated expenses, you can share this
with your mortgage rep., who will then ask you how you would like to break
down the disbursements (or "draws" as we commonly know them). This will be
your decision (with a little hand-holding). At first, you might want to schedule
a couple dozen draws, until you realize that there is a service charge attached
to every draw. For instance, every time the bank releases a draw, you have
to notify them a few days in advance. The bank sends out an inspector to
verify that the promised work was performed. Then they order a Title Search
to verify that you haven't had any liens put on your property since the last
draw (this costs about $125 each time).
This leads us to the next issue that pertains especially to building a log
home. Normally, banks release a draw after the work has been completed. However,
log home manufacturers require COD when the logs are delivered (or ideally
the day before). Historically this had been a bone of contention between
the banks and manufacturers, until certain banks took the lead and set up
accounts directly with the log home companies. This expedited the whole process.
These direct deposits become draws on your construction loan.
EXAMPLE: In our case, we ordered a total of 11 draws. On settlement of the
construction loan, the bank started us with about $38,000 for misc. expenses.
We used much of this to bridge the gap between draws (the contractors want
to get paid regularly). There was a draw for the Log Kit deposit. There was
a draw for our Superior Walls precast foundation (another direct deposit).
Another draw paid for the COD log delivery; another draw paid for the window
Then things got more tricky, because the next draw covered the well and septic,
which had to be completed first. Once the log walls were raised another draw
came, another when the "weathered-in shell" was complete, and another draw
when the mechanicals were installed. The last draw came at the end of the
project, but the bank wouldn't release the money until we had stained the
house and planted grass seed. They wanted to make sure the house was ready
With luck, you won't be delayed by weather or on-site errors, which could
derail your whole plan. However, if you don't have some extra money set aside,
your contractors might quit working until they get paid, knowing full well
that you won't get paid until the work is finished. Coffee and donuts help
to keep relations smooth, but nothing works like cash.
And remember: if by some miracle you don't use all the money you requested
in the construction loan, you can always give the rest back. So don't cut
corners. Estimate high, spend less, and you just might have enough left over
for that luxury item you always wanted.
About the author: Mercedes Hayes is a Hiawatha Log Home dealer and also a
Realtor in New Jersey and Pennsylvania. She designed her own log home which
was featured in the 2004 Floor Plan Guide of Log Home Living magazine. You
can learn more about log homes by visiting
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