Are you interested in building your own house? It’s an exciting proposition because you can choose everything that goes into the process from scratch.
You don’t have to worry about a builder telling you you can’t have something you like.
Custom build by customizing things the way you want! When setting out to buy land for your dream home, there are a few key considerations.
One of the most important will be how you should finance the purchase. We will look at two options. Using a land loan and obtaining a construction loan.
If you are not building for a while, a land loan will be preferable. On the other hand, if you plan to start construction right away, a construction loan will be the best solution.
Obtain a land loan
When you’re thinking of buying land but aren’t quite ready to build your dream home, a land loan works best. There are essential things to know when using this type of financing.
These loans are more difficult to obtain and not all lenders grant them. Although lot loans are similar in some ways to home purchase loans, you can expect to need higher down payments.
You’re also likely to see higher interest rates on your mortgage and more scrutiny from the underwriting process.
Lenders will distinguish what they are willing to do based on the state of improvement of the land in its current state.
For example, is it ready to be built? Can you get planning permission and start tomorrow or are their additional upgrades needed such as utilities?
With land loans, lenders will distinguish between ready-to-build land and undeveloped vacant land. There will be many more restrictions when the earth is not ready to go.
Use of construction loan financing
When you’re ready to build your home right away, a construction loan will be the perfect financing package.
The way a construction loan works is that the lender will give you the financing to buy the building plot and build the house.
It will be a loan that will combine the costs of acquiring the land and the costs of construction into a single mortgage.
You will need to provide the lender with many of the same documents needed to obtain a traditional loan with a few additions.
Plans will be needed, the cost of construction, as well as builder qualifications and license information.
Lenders who provide construction loan financing will grant the borrower “drawdowns” as construction progresses. For example, when the land is cleared, the foundation is dug and poured, and utilities have been installed, the lender will provide the first draft.
The lender will send a representative confirming that the work has been completed and then release the funds to you.
You can then turn around and pay all the subcontractors. The next draw will take place when the house is fully framed.
The lender will continue to do so with several construction phases until the project is completed.
With construction loans, you will usually need a down payment of at least 20%. The average down payment is larger with construction financing.
When researching lenders, you will also learn that only a select few lending institutions will provide construction loan financing.
Maximum Real Estate Exposure has provided a great resource on everything you need to know about getting a home construction loan. Looked!
Whether you choose land loan financing or a construction loan will depend on your construction timelines. Researching your options ahead of time will make the whole process much smoother.
Before making an offer on land, due diligence will be crucial.
Bill Gasset is a nationally recognized real estate leader helping people buy and sell real estate in the Massachusetts metro area for 35 years. Bill is the owner and founder of Maximum real estate exposure. For the past decade he has been one of the top RE/MAX REALTORS® in New England.