Tips to Tap when Financing Your Log Home
Kevin J. Daum

This article was originally published in a 2006 edition of Log Homes Illustrated magazine.

Building a Log Home is the number one dream of a lifetime for many people.  Oddly enough paying for it ranks substantially lower on the list.  It’s not just the money itself, but rather all of the complicated calculations, details and decisions associated with paying for what will likely be the most expensive purchase you’ll ever make.  No wonder people would rather spend so much more time learning about the wonders of the building process and investigating finish materials instead of wading through paperwork and playing with calculators.

Who wants to deal with the petty, ugly details of financing?  I mean let’s face it, we want to enjoy all the fun of a fantastic dinner at a fancy restaurant but does anyone really look forward to picking up the check?  Well have no fear.  I have gone to the trouble of putting together a tip sheet that outlines some of the basic issues related to financing the project.  It is by no means the be-all end-all for everything you will need to know to manage your project financially (There are great books out there for this.) but it will serve as a quick reference to make sure you have addressed the major issues of financing your dream log home.

Assessing Your Financial Situation

No need to go into this project with your eyes closed.  This is the time to make sure you have all of your finances in order and determine your fiscal limits.  Check below to make sure you have prepared yourself for all of the expenses and requirements coming your way.

Cash – This is the most important commodity in any building project.  You need to hoard your cash throughout the project.  Now is the time to tap equity lines and hike your savings.  The banks will want to see plenty of this at each stage of financing and you will need cash for deposits and running the project.  The amount can vary but if you are working with less than 20 percent of your project cost in liquidity you may have some hard times ahead.

Credit – It’s all about the score.  Credit scoring today can make or break your ability to finance your home.  If your score is 700+ you have lots of options.  699 and below is still fundable but programs may be limited or more expensive.  Start boosting your score today.  Make sure you are paying your bills on time.  If you have some scratches call, beg and plead to get them straightened out.  Keep those credit card balances low.  High credit card balances are the most common score reducers.  Lastly, don’t run your credit any more then necessary.  Unneeded inquiry can cost you points as well.

Payment – With today’s abundance of No-Income-Qualification loan programs payments are now more an issue of affordability rather than a deciding factor in getting a loan.  This means that you need to be more diligent about determining how much you can afford.  Make sure you consider all of the issues including tax deduction and having diversified investments.  Often a slightly higher payment and more liquidity is a better route to protect you in case of job loss or other financial catastrophes.

Buying Land

What good is a house without land to put it on?  Not every piece of land is worth the asking price and sometimes the value is determined more by the home you choose to put on it.  Make sure you address these issues before plunking down your hard earned money on some dirt.

Choosing a lot – Certain types of land are easier to finance than others.  Many people love the idea of open space but lots over 20 acres are often shunned by institutional lenders.  Make sure the utilities are nearby.  Lots without electricity or “off the grid” are nearly impossible to finance as are the homes on them.  Septic and well can be acceptable but make sure they are adequate to meet county guidelines for building.

Getting a loan - The good news is that the days of having to buy land all cash or with 50 percent down are gone!  There are plenty of lenders out there offering financing with as little as 10 percent down and often without the need for tax-returns or other income documentation.  One caveat however is that often these lenders are the same ones offering construction loans and the income information you provide will need to be consistent for both loans. 

Pay careful attention to the term of the loan as well.  A two year loan may seem long enough for plans and permits but the process can often go longer and there are few lenders offering refinancing on land.  Lastly, remember to hoard your cash.  No lender cares if you pay off your land so don’t!  Lenders want to see money in the bank!

Designing the Home

Now comes the fun part.  This is your chance to design the home that fits you best.  There are many log home companies to choose from.  Luckily most will customize their plans to fit your desire.  While they offer a variety of engineering techniques and financial structures the important thing is for you to pick a company where you like and trust the people you are dealing with.  Find the company you believe will stand behind their product and support you before during and after the home is built.  Here are a couple of other things to consider during the design process.

Go for marketability – Of course one of the attractions of a custom home is creating your own floor plan and home style.  Beware however that stretching too far from the norm can put your hard earned money at risk.  Remember, this will be your home but you are spending a lot of money and the best way to protect your investment is to be sure you can sell it quickly if you need.  Check out the other houses in the neighborhood to make sure you are neither over-building nor under-building.  Try not to create anything so unique that no one else would ever buy it. 

Figure all your needs and wants up front – Nothing makes for aggravation in a custom log home project more than last minute changes.  This is the number one cause of going over budget.  You can avoid changes by making decisions early in the process.  Think about all of the different decisions to be made while designing with your Log Home Dealer.  Shop on line or at home improvement stores and pick out all of your fixtures and hardware before you start talking to builders.  Giving them all the same model numbers on finish items will insure that everyone is bidding on the same items.

Picking a Builder

Your builder is your friend and the caretaker of your dream.  Choose carefully even if you choose yourself.  Keep the following in mind.

Choose your experience – Everyone knows to compare price and to investigate quality when picking a builder but considering personality is just as important to insure a good experience.  Find the builder that compliments the way you work.  If you are too busy to be involved in the project make sure the builder is a take-charge person who will get the job done.  On the other hand if you are going to micro-manage the process you will need a more laid back builder who will enjoy having your involvement.  Interview extensively to make sure you have the right fit.

Deciding to go Owner-Builder – Saving money by eliminating the contractor depends heavily on your skills and connections.  If you are an excellent manager and know lots of suppliers and people in the trades, being and Owner-Builder may be just the thing to inspire the Bob Vila nestled inside you.  Don’t forget to value the cost of your own time however and be sure you are up to taking on full responsibility for the happiness of your family in their home for years to come.

Getting a Construction Loan

The number of national lenders offering construction loans for log homes has increased substantially over the last few years.  This means that there are more options and programs available.  Not all loans are the same so here are a couple of hints to help you through the financing process.  For detailed information in this area check out my book Building Your Own Home For Dummies (Wiley).

Rates are less important – The best construction loans today are “Single Close” meaning the construction loan automatically rolls into the permanent loan.  Often these loans are around prime during construction and then roll to market rate.  Since they are similar the difference between loans has more to do with the amount you can borrow, how you qualify, the need for log home comparables, the disbursement process, etc.  Spend a good amount of time learning the details of the different loans so you can compare loans and lenders on an even playing field. 

Use the Expert! – You can’t really afford to make the wrong decisions about financing your project so it’s important to find the right Loan Officer to guide you through the lending process.  The challenge in today’s market is that many Loan Officers claim to be experts that aren’t.  Nothing beats experience.  Find a Loan Officer who has funded at least 50 construction loans and has handled log homes regularly.  Make sure you check their references carefully.

Picking a Permanent Loan

Now that the home is almost done and you’re ready to move in you are ready to make a decision on final financing.  Many of the construction loans today as stated will roll to permanent but you still have to pick the right program for your needs.  Take the issues below into account in your decision making.

Take the money! -  More often than not projects go over budget.  You may have finished the house but more expenses are coming such as furnishing, decorating, landscaping, etc.  Make sure you have taken all the cash afforded to you in your construction loan.  You want to avoid the costs of going back to the home to get more money.  The rates could be higher and your qualification situation may change.  There can be tax benefits to taking more money at the beginning as well.

How long will you be there? – The lenders today offer many loans fixed short term that can save you money.  Since amortized loans only reduce principle slightly in the first few years, “Interest Only” options can help reduce your payments without substantial risk if keeping your loan for 5 to 7 years which is typical for the average family.  There are many tax benefits to be had by selling or refinancing every so often.  Talk to your CPA and financial planner to learn all the subtle ways to improve your finances with the right permanent mortgage.

Read and Ask!

While this information should be a good reference for you to start assessing your financial responsibilities for a log home project, by no means will this serve as a total primer for everything financial.  Make sure you give proper attention and time to learning everything you can from books and experts on the subject.  Most importantly, if you are unclear on a particular issue, speak up and ask the question.  This is your home and dream and you are entitled to a minimum of unpleasant surprises.

About the Author...
Kevin Daum is the Founder and CEO of Stratford Financial Services, a Real Estate finance and education company, founded in 1989. Stratford specializes in Purchase loans, Refinance loans and Custom Home Construction finance and has successfully financed thousands of clients. He is the author of "Building Your Own Home for Dummies" (Wiley), as well as "What the Banks Won’t Tell You." Mr. Daum was an Underwriter for Plaza Savings and Loan and Key Bank of New York. He is an INC 500 CEO and has been listed as one the 40 Most Influential People Under 40 in the San Francisco Bay Area. He is the Global Chair for the Edison Innovation Program with the Young Entrepreneurs' Organization (YEO) and is a founding Board member of the Bay Area Chapter of YEO.

Mr. Daum is a frequent contributor to numerous business publications on the subjects of Real Estate and Small Business leadership and speaks regularly on both subjects. He can be contacted at kevin@stratfordfinancial.com.