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