Paying for a log cabin home is a bit different from what people might be used to with regular home mortgage financing. The big difference has to do with the collateral involved used to make the loan secure. In a traditional home loan process, the builder already has a steady reputation in the market, so the bank or lender is not worried that the home will be built. As a result, when the home is financed, the loan is tied to the home constructed and not released for purchase until the home is actually built and finished, as confirmed through the escrow process. This way, the lender is fully protected and, if the loan fails, can seek title to the home and sell it for recovery. Ergo, mortgages are very safe financial lending bets for banks.
Log Cabins are Not Built Yet
In the case of a log cabin home (more info here: https://frontierloghomes.com/ ), they tend to be custom-made and constructed when financing is secured. That means there is no finished home for the bank to secure as collateral when a home loan is provided. That negates the protection the bank has, and as a lender, it doesn’t want to provide a security-free mortgage loan. So, instead, a prospective log cabin homeowner has to get two loans: one to build the log cabin home, and then a second to pay for it all and the purchase as a regular mortgage.
Better known as a construction loan, the first financing basically provides the means to pay for the building, assembly, work, labor and finishing of the log cabin so that there is a finished home. The homeowner doesn’t have a title yet; this financing simply covers all the expenses of building the home in the first place.
Then the mortgage loan comes in to pay off the construction loan, purchase the land and title, and complete the real estate transaction in total. That second loan is secured with the home as collateral, keeping the mortgage lender whole.
So, Who Provides the Construction Loan?
Ironically, a construction loan could be provided by a lender, a lender partnered with the construction company, or complete separate bank. The funds are released as the construction happens in stages, so progress can be determined, and the initial lender is not put at risk of losing the entire construction financing. In many cases, this is made possible by the strength of the construction company that already has a relationship with a given bank. Both then work at speed to transition the first phase to a mortgage loan as soon as the construction is complete.
A log cabin can be a great way to build a home and at a far lower cost than today’s typical real estate tract home. The financing is just a different process and more steps involved to get from a wish to a home that will last for decades. And for those who want a dream log cabin home, it’s very much worth the extra effort.
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