Building a Home – Land Loans and Construction Loans

Buying land and building a home is very different from buying an already existing home. Building your own home is probably the best way to get exactly what you want, but it can be challenging. But do not let this dissuade you if your own custom or semi-custom home is your dream! If you are thinking of building, you should have a basic understanding of how a home construction project can be financed, and that is what this article provides. Most home buyers are familiar with a typical mortgage loan used to finance an already-built home, but conventional mortgages are different from lot, land and construction loans.

APPLELoans to Buy Vacant Land or a Lot

If you have found the perfect piece of land for your new dream home but are not quite ready to build, you should be prepared to either pay cash for the land or to find a lender who finances land. It is harder to find a lender who offers lot/land loans than one who offers conventional mortgages. You also should expect less favorable terms with a land loan – such as a higher down payment and higher interest rates. This does not mean it cannot be done! You may be better off starting your search for a lender with smaller, local banks than a large bank. If you are dealing with large rural pieces of land, call MidAtlantic Farm Credit, they can be very helpful with their residential loan programs on larger more rural tracts of land.

Construction Loans

If you are closer to achieving your dream, and have found your land and a builder who will build you your dream home, you will want to opt for a construction loan. These loans allow you to purchase the land and finance the construction of the home at the same time; or if you already own the land, this type of loan will be used for the construction of the home. Construction loans are unique, and only certain lenders offer them because they involve different paperwork and procedures compared to many more conventional loan types. A construction loan acts as short-term loan that funds your project through the construction period in periodic advances, called draws. Typically, once the home is completed, the construction loan can be rolled over into a conventional mortgage loan, with a regular monthly payment (called Construction-to-Permanent loan). At the onset, you usually need to be prepared with about 20% down and/or to pay for the land/lot outright.  I have recently become aware of some lenders who will lend with only 3.5%-5% down if you are building a modular home.  Please contact me for more information – Barbara Winn, 484 547 3098, barbarawinn@kw.com.

buildingahomeIf you are not working with a lender already, you may want to find a good mortgage broker, feel free to contact me to recommend one (Barbara Winn, Barbarawinn@kw.com, 484 547 3098). An experienced mortgage broker generally has many different sources of loans and can usually get you better rates and a better loan package than you could find by yourself.

Other Resources

If you are having trouble finding a traditional lender or mortgage broker to help you finance a land purchase, there are alternative ways to purchase your lot.   A common way to finance the purchase of land is to use a home equity loan from an existing residence, or to ask for loans or gifts from family members. Another option is Seller financing. Many motivated land sellers may be willing to allow you to finance your purchase through them instead of making you come up with the full price at the time of purchase. Another option is to sell your existing home and rent for a while if you need the cash to start the land buying/construction process.