Financing Your Log Home

Myths abound that log homes are more difficult to finance; the truth is, lenders tend to prefer what is most common, and shy away from the unconventional. That said, with thousands of log homes in existence today, financing has become easier than it may have been just a few years ago, with some lenders catering specifically to the log home market.

Mortgage Financing

Many banks and mortgage lenders have little experience in log home financing, as some feel that log homes are appreciably different from conventional construction so that the general financing guidelines exclude them. This is not the case. First, though, let's explain how mortgage financing works:

Nearly all mortgage lenders lend money according to a set of standards established by the Federal National Mortgage Association - abbreviated "Fannie Mae". Fannie Mae's guidelines for appraisal tell the appraiser to find three homes of similar style and construction that have been built and sold in the same area as the house in question within the last 12 months. The sale price of these would be compared to the proposed home to establish the home's market value. These homes are referred to as "comparables" or, shortened, "comps." This has at times been interpreted to mean that the appraiser has to find three log homes within a certain radius or county that have sold within the last year. That's nearly impossible in most areas, and would seem to make log homes impossible to finance! Fannie Mae, though, sees log homes as being "rustic construction and style", just like a rustic wood frame home with cedar siding, as an example. Therefore, any rustic style home can be used as a comp. The appraiser or mortgage loan officer just needs to contact FNMA to get their clarification. A mortgage can then be issued, based on the appraised value of the home and property, the construction costs and the customer's credit and ability to repay the loan.

Construction Financing

The mortgage, or long term financing, will only be issued on an existing structure. A construction loan must be arranged to get the home built. Many banks can issue both types of loans, rolling them together into what are called "Convertible" or "Permanent" Construction loans.

In the event that your mortgage is coming from a different source than your construction loan, which can be written by a local bank, the mortgage company can issue an Irrevocable Letter of Credit, or L.C., to the bank guarantying that the construction loan will be paid off by the mortgage company upon completion of the home. The construction loan can then be written by the bank with the assurance that they will be repaid according to the terms of the L.C.

Construction loans are generally written as 90 day or 120 day notes. Funds are made available either at set intervals as different stages of construction are completed, called "draws", or as receipts are turned in as proof that work has been performed. Each bank will have its own method of payment and inspection.