How to Budget & Shop for a Lender

From cabins, to cottages, to your forever home, the number one thing on most people’s minds when building a timber framed home is the cost. In new home construction, a commonly used process to define a budget is a “dollars per square foot” calculation. While that simple mathematic equation is good as a general guide, this “per square foot” calculation often leads to incorrect expectations on budget. With hundreds, if not thousands of components and many variables, this calculation requires your input to be accurate.

Imagine asking someone the cost of a bag of groceries. You would want to know what is inside in order to estimate the overall cost. Flour? A big bag of rice? Four wine bottles? Did they select two-buck chuck or imported wagyu beef? Similarly, a custom timber frame house is potentially a one-off creation with thousands of variables.

What is the cost to build a timber frame? Like a bag of groceries, it depends. The timber frame plans that Woodhouse creates for its clients tend to be as unique as fingerprints. This makes it impossible to come up with a predictive budget formula that would apply coast-to-coast. While the costs for building materials, labor, land, and development fees fluctuate by season and local economies, Woodhouse and their four decades of timber frame construction experience is here to help.

Dream Home Budget Calculator

Your best bet for developing a ballpark budget for your home is to use Woodhouse’s dream home budget calculator. Simply fill out the 20 questions to generate a ballpark price for your dream home. As a guide to better understanding how the budget is affected by your input, try the calculator out a few times with different variables. Click here to start.

Woodhouse’s Regional Project Managers

With a history in timber frame home construction and a knowledge of your local building area, Woodhouse’s RPMs provide valuable local insight into your specific building expenses. A phone call is often followed up with a site visit where they will impart their timber frame or post and beam wisdom and share their thoughts on your goals. Find a Woodhouse RPM here.

Woodhouse’s Superior Building System

It’s worth noting that the timber frame homes Woodhouse delivers are far superior compared to conventional stick frame construction. In fact, Woodhouse’s building system is state-of-the-art.

Your Woodhouse timber frame will last for centuries, creating a legacy for future generations. The frame of your home will be enclosed by structural insulated panels, or “SIPs”. SIPs offer numerous advantages over conventional 2×4 and fiberglass insulation. These include:

• A healthier home with better indoor air quality and ample daylight
• 75% energy savings over the life of the home
• 55% faster construction time, saving labor costs
• Greater structural strength
• Reduced waste
• A tighter building envelope
• A quieter interior
• A more comfortable living environment

Labor & Material Specification

Building a new timber frame home can be divided into two components: labor and material specification. Both designate the quality to which the home will be built. Unless you request a specific quality level, product or brand name, a builder will deliver “builder’s standard” — labor and material acceptable to most individuals and to the local building code.

However, before you blindly accept the builder’s standard, we recommend you ask for a clear explanation of their process, as well as other options and their associated costs.

Shopping for a Lender

After the housing crash of 2007, most large U.S. banks deemed construction loans for new homes as too risky. If you will need to finance construction on your dream timber frame home, seek out smaller banks and credit unions, especially those that offer one-close, construction-to-permanent loans, to help you save money.

What will you need to shop for a lender?

• A 700+ credit score is ideal
• Two years of W2, 1099 and full 1040 (federal, not state) forms, both personal and business, plus K-1 form (if applicable)
• Thirty days of pay stubs or monthly pension advisements
• Your Social Security or pension award letter
• Two months of complete bank statements for accounts, including savings, checking, stocks, etc. — every page, not just the summary
• Your most recent quarterly 401k statement and/or other retirement accounts
• A letter of explanation on any negative credit (if applicable)
• A mortgage statement for your current home and any additional properties
• An estimated contract for your new timber frame home plan to justify the amount you want to borrow
• A contract for the land on which you intend to build
• A 20% down payment for conservative lenders; others will allow as low as 5%

With this information, lenders will look at your income-to-debt ratio, any large or unusual deposits, and your work history to help them determine your ability to repay the loan.

Ratios can fluctuate between lenders. Most lenders will allow a 43% total debt-to-income ratio for purposes of a qualified mortgage. Some lenders can also offer non-qualified mortgages (debt-to-income over 43%) with compensating factors such as a high amount of reserves or a high amount of discretionary income.

Finalize Your Loan Checklist

To finalize your timber frame construction loan, lenders will want to know exactly what you’re building, how much it will cost, how long it will take, and who your timber frame builder is. Here’s what you will need to provide to your lender:

• Building permits: construction documents submitted to the local building department
• Woodhouse contract: list of supplied materials
• Plans and specifications: construction drawings, detailed materials specifications and descriptions of building materials
• Builder contract: the agreement between you and your general contractor or home builder, including proof of insurance and building licenses
• Statement of abilities: if you’re intending to do some of the work yourself, you will need to furnish your qualifications, including descriptions of past projects
• Survey or plot plan: this plan shows the exact location of your land and provides a legal description of the property
• Land deed: the document shows the title and mortgage information on the property where you intend to build

Once the loan is granted, the lender disburses money according to a draw schedule, meaning a series of payments for work completed by various trades and craftsmen. Progress is verified by on-site inspections.

Typical draw schedules for most homes include five to six payments. The first might be made when the foundation is completed, including steel I-beam, trusses and decking for the first floor. The second is made when the timber frame is erected. The third draw could cover the cost of enclosing the timber frame with structural insulated panels or SIPs.

The next-to-last draw is disbursed once a certificate of occupancy is issued and you can move in. This last draw is disbursed 60 to 90 days after your official move-in date.

Woodhouse requires payment before cutting and shaping the timber frame of your new home. You should secure construction financing to pay for this cost.

Some lenders view a timber frame as just another load of lumber. They’ll release funds when Woodhouse requests them.

In other cases, the lender may refuse to release any money until the timber frame is delivered to your building site. If this occurs, ask your lender to issue a promissory note to Woodhouse guaranteeing that payment will be made on delivery. The lender can wire transfer the money the same day that the timber frame arrives on site.

The Appraisal Process

Appraisers seek comparable sales within your same neighborhood or of homes with the same style, square footage, age, lot size, exterior amenities, and overall quality of construction. Preferably, these comparables are from properties sold within the last 90 days.

At issue is what ultimately happens to your mortgage loan. Some lenders will keep a mortgage in-house or within their own investment portfolio. However, if your lender plans on selling the loan on the open market or to Fannie Mae (the Federal National Mortgage Association), the loan will need to conform to certain guidelines.

These guidelines can include proximity, status, and date. For suburban neighborhoods, comparables can be from one to five miles away. For rural neighborhoods, comparables can be five to 20 miles away. These distances can be stretched if the appraiser can find a similar timber frame home that was recently sold. Therein lies the challenge. Since many timber frame homeowners live out their lives in them, then bequeath them to their children, finding comparables can be difficult. Most underwriters and investors will allow for a little further distance when finding a similar type of home.

Status and date are also part of the appraiser’s formula, which includes at least three closed comparables, two of which were sold within 12 months. Many lenders now also require at least two pending or active comparable listings as well.

If the appraiser is using custom-built homes, the appraiser does need to keep within prescribed distances. A portfolio lender or a bank that intends to keep the loan in-house can also make some exceptions to the appraisal guidelines, allowing farther distances, and allowing for older comparables.

Homebuyers usually put 20% down, plus land equity into the deal. However, if the appraisal comes in low, you may have to come up with more money. Some lenders will increase their lending rate to 90% of the loan to help offset the additional money needed if an appraisal comes in short.

If timber frame homes are plentiful where you are building, you will likely not have any problem with the appraisal. If timber frame homes are rare, or few have been recently sold in your area, you may have to come up with more money to earn your loan approval.

Recommended Lender

Woodhouse has a longtime relationship with New Century Bank in Manhattan, Kansas, which provides loans for homeowners nationwide.  This lender has lending programs specifically geared toward the timber frame home building process. Visit NewCenturyBankna.com or call Anthony Padgett at (888) 235-7976.