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Does a Construction Loan Include the Land? Everything You Need To Know
If you’re looking to build your dream home from the ground up, you’ll need financing that covers both the land purchase and construction costs This is where construction loans come in. But does a construction loan include the land too?
The short answer is yes, construction loans can include the cost of the land in most cases. However, the specifics depend on the type of construction loan you get.
In this comprehensive guide, we’ll cover:
- What is a construction loan and how does it work?
- Types of construction loans
- Do all construction loans include land costs?
- Tips for getting a construction loan that covers land
- Alternative options if your loan doesn’t cover land
- FAQs on construction loans and land
Keep reading to learn everything you need to know about whether construction loans include the land purchase. With the right information, you can choose the optimal financing and build your dream home.
What is a Construction Loan and How Does it Work?
A construction loan is a short-term loan used to finance the building of a new home. The funds are disbursed in stages as construction milestones are met.
Here are some key things to know about how construction loans work:
- Loan term is around 6-12 months during the building phase
- Make interest-only payments during construction
- Loan converts to a normal mortgage once construction is finished
- Requires 20% down payment in most cases
- Has higher interest rates than conventional loans
Construction loans allow you to spread out the financing needed for your custom build. But on their own, they may not cover the land purchase upfront. Let’s look at the types of construction loans and their land coverage.
Types of Construction Loans
There are several varieties of construction loans, each with different policies regarding land costs:
Construction-Only Loan
- Covers build costs only
- Short-term financing (6-12 months)
- Land purchase must be financed separately
Construction-to-Permanent Loan
- Single-close loan covers construction and permanent financing
- Includes both land and build costs
- Converts to regular mortgage after build phase
Renovation Loan
- For remodeling/renovations, not new builds
- Does not include land purchase
Owner-Builder Loan
- For owner-acting-as-contractor
- May or may not include land
As you can see, construction-only loans do NOT include the land purchase. But construction-to-permanent and owner-builder loans CAN include the land in the same loan.
Do All Construction Loans Include Land Costs?
Whether land is included depends on the loan type:
- Construction-only loans do NOT cover land costs
- Construction-to-permanent loans DO include land purchase and build
- Owner-builder loans may include land costs
With a construction-only loan, you’ll need to finance the land purchase separately, either with cash or another loan.
But construction-to-permanent and owner-builder loans combine the land purchase price and construction costs into one convenient loan.
Tips for Getting a Construction Loan That Covers Land
If you want a construction loan that includes the land costs, consider these tips:
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Apply for a construction-to-permanent or owner-builder loan – These allow land to be financed along with construction in a single loan
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Shop around with multiple lenders – Each lender has different requirements on land inclusion
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Put 20-25% down – Larger down payments give you better chance of approval and land coverage
-
Have excellent credit – Minimum scores around 680+ help qualify for the best loan programs
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Lower your debt-to-income ratio – Lenders want to see you can afford loan payments
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Purchase land upfront in cash – Then it won’t need to be covered in the construction loan
Following these best practices can help you find a lender willing to include the land purchase in your dream home construction loan.
What If Your Construction Loan Doesn’t Include Land?
If your construction-only loan doesn’t include the land financing, don’t panic. You have options, such as:
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Separate land loan – Finance just the land purchase price with a separate loan
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Pay cash for land – Save up money to buy the lot outright before getting construction loan
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Owner financing – Seller finances land purchase directly, spread out over time
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Purchase land first, then get loan – Buy lot with cash, get construction loan after
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Alternative construction loans – Owner-builder or renovation loans may cover land
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Delay project until you have enough cash – Save up to buy land and finance build together
While paying cash upfront takes discipline, it simplifies the construction loan process and ensures the land is covered. Talk to lenders to find the optimal strategy for your situation.
FAQs on Construction Loans and Land
Do construction loans cover land?
Some do, some don’t. Construction-only loans generally don’t include land costs. But construction-to-permanent and owner-builder loans often include land financing along with the build costs.
Can I pay cash for the land separately?
Yes, you can purchase land with cash upfront before taking out a construction-only loan. This allows you to buy the lot outright without financing it.
What credit score is needed for a construction loan with land?
Construction loans typically require excellent credit, around 680-700+ minimum. Higher scores increase chances of getting land approved in the loan.
How much down payment is needed on a construction loan with land?
Expect to put down around 20-25% of total costs for land and construction. Larger down payments can help secure approval for land inclusion.
Should I buy land before applying for the construction loan?
It’s generally recommended to purchase land upfront in cash before getting a construction-only loan that doesn’t cover land. This simplifies the loan process.
The Bottom Line
Construction loans are an excellent option for building a custom home from the ground up. While construction-only loans don’t include land purchase, construction-to-permanent and owner-builder loans can finance both land and construction costs.
If your loan excludes land, buying the lot upfront in cash is advisable. This allows you to secure the perfect site for your future dream house. With the right loan choice and smart planning, you can make your vision a reality.
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- Construction loans are short-term loans that you can use to build a new home.
- Some construction loans can be converted to mortgages after your home is finished.
- Construction loans typically have tougher criteria than conventional mortgages for existing homes.
If you can’t find the right home to buy, you might be thinking about building a house instead. Financing this type of project is somewhat different than getting a mortgage to move into an existing property. Instead of a mortgage, you take on a construction loan (also known as a construction mortgage). Here’s what to know about construction loans.
Construction loans vs. traditional mortgages
Beyond the cost and repayment timeline, construction loans and mortgages have a few main differences:
- The funds distribution: Unlike mortgages and personal loans that provide funds in a lump-sum payment, the lender pays out the money for a construction loan in stages as work on the new home progresses. These draws tend to happen when major milestones are completed — for example, when the foundation is laid, or the framing of the house begins.
- The repayments: With a mortgage, you start paying back the principal and interest right away. With construction loans, your lender will typically expect you to make interest payments only during the construction stage. Additionally, borrowers are typically only obligated to repay interest on any funds drawn to date until construction is completed.
- Inspection/appraiser involvement: While the home is being built, the lender has an appraiser or inspector check the house during the various construction stages. As the work is approved, the lender makes additional payments to the contractor, known as draws. Expect to have between four and six inspections to monitor the progress.
- Requirements: Construction loan requirements include being financially stable and having the ability to make a down payment. Lenders also want to see a construction plan, which you can read more about below.
- Interest rates: Construction loan interest rates are typically higher than traditional mortgage rates. This is often because you’re not providing collateral to back the loan, which means the lender is taking on more risk.
Construction Loans: What They Are and How They Work (IN DETAIL)
What is a construction loan?
A construction loan is short-term financing that can be used to cover the costs associated with building a house, from start to finish. Construction loans may cover the costs of buying land, drafting plans, taking out permits and paying for labor and materials.
What is the difference between a construction loan and a land loan?
For example, if you took out a construction-only loan and then refinanced into a permanent mortgage once construction was complete, your permanent mortgage might be called an end loan. A land loan only covers the cost of purchasing land that doesn’t have habitable structures on it.
Do you need a construction loan?
Unless you are paying cash for your project, you will need a construction loan to pay for the materials and labor, and you can use it to buy the land as well. Construction loans are a bit more complicated than conventional mortgage loans because you are borrowing money short-term for a building that does not yet exist.
Can I get a construction loan if I already own land?
If you already own the land, you will have an easier time getting a construction loan. The land will count as owner’s equity in the project, and you may be able to borrow up to 100% of the construction cost if you meet the loan criteria (credit score and debt/income ratio) and the completed project appraises well. Construction Loans for Land.