Loans For Buying Land And Building A House – The Complete Guide

Buying land and building a custom house from the ground up can be an exciting and rewarding experience. You get to design every aspect of your dream home exactly how you want. However it also requires careful planning and financing. Securing loans for buying land and constructing a new house can be complicated but is feasible if you understand the process. This complete guide will walk you through everything you need to know about getting loans to purchase land and build a custom home.

Why Getting Loans For Land And Construction Is More Complex

Getting financing to buy land and build a home is more complex than getting a traditional mortgage for an existing house Unlike a finished home, vacant land has no structures attached that can be used as collateral for lenders And construction loans carry more risks for lenders than mortgages on completed homes. As a result, qualifying for land and construction loans typically involves

• Higher credit score and down payment requirements
• Higher interest rates
• More fees and closing costs
• More qualifications and paperwork for lenders

However, don’t let the additional complexities deter you. With proper planning and preparation, you can get approved for financing to buy land and build your dream home.

Land Loan – Financing To Purchase The Lot Or Land

The first loan you need to obtain is for purchasing the vacant lot or land to build your home on. This is called a land loan or lot loan. Land loans are offered by banks credit unions or online lenders.

With a land loan, you will receive funds to buy the land only. The loan amount will be based on the purchase price and down payment. Land loans typically have higher interest rates, larger down payments, and shorter repayment terms than mortgages since there is no house as collateral.

Requirements for qualifying for a land loan include:

• Down payment – Often 20% or more
• Credit score – 720 or higher ideal
• Debt-to-income ratio – Below 43%
• Verifiable income and assets
• Detailed construction plan and budget

Once you purchase the land, you will repay the land loan through scheduled payments over 5-10 years in most cases.

The Construction Loan – Building Your New Home

After buying land, the next loan you need is the construction loan to finance the building of the new home itself. A construction loan covers all costs to build the home from the ground up such as:

• Building materials
• Labor
• Permits and fees
• Other construction costs

With a construction loan, funds are issued in multiple installments. As certain milestones are reached in the building process, your lender will release another portion of the loan amount. This system ensures the funds are used appropriately for construction.

Construction loan requirements are stricter than mortgages. You’ll likely need:

• Down payment – Typically 20-25%
• Credit score – 720 or higher
• Debt-to-income ratio – Below 43%
• Verifiable income/assets
• Approved house plans
• General contractor

Interest rates on construction loans are also higher than mortgages, and you’ll pay fees for each draw installment released. Once the home is finished, the construction loan converts into a traditional mortgage using a refinance.

Combined Land And Construction Loan

Some lenders offer combined land and construction loans. This option rolls financing for purchasing land and building costs into one loan. It can simplify the process since you only complete one loan application and closing.

With combined land/construction packages, you receive the land purchase funds first. Once you own the lot, the remainder of money is distributed in installments as the house is built.

Qualifying for a combined land and construction loan is challenging. Requirements are stricter than obtaining separate land and construction loans. You’ll likely need a 25% or higher down payment, 750+ credit score, and significant assets/reserves.

USDA And VA Loans For Land And Construction

Certain government-backed mortgage programs can provide more affordable financing options for buying land and building a home.

The USDA offers a specific loan for this purpose to low-to-moderate income borrowers in rural areas. USDA land and construction loans feature:

• 100% financing – No down payment required
• Below market interest rates
• Low or no mortgage insurance

VA loans also allow 100% financing for purchasing land and building a home if you’re an eligible veteran or service member. Benefits include:

• No down payment required
• Limit on closing costs and fees
• No monthly mortgage insurance

If you may qualify for USDA or VA programs based on location or military status, explore using these loans for significant savings on your land and construction project.

Alternative Financing Options

If you have trouble qualifying for a traditional land and construction loan, alternative options may be available.

Seller financing – Some land sellers may be willing to finance the purchase directly. This avoids bank qualifying. However, your purchase rights and legal protections may be weaker.

Home equity loan – Existing homeowners can tap their home equity to finance buying land and construction. Interest rates are usually lower than land loans, but you risk your current home if you default.

Personal loan – Financial institutions and online lenders offer personal loans that can be used for any purpose. Interest rates are higher but qualifying is easier than land or construction loans.

Renovation mortgage – Some lenders offer renovation mortgages that combine purchasing an existing home and financing planned improvements or renovations. This allows you to buy a rundown home on land you like and renovate or rebuild it.

While costlier, these alternative options can allow you to finance land and building costs if you don’t qualify for traditional construction and land loan programs. Shop around to find the most affordable option that fits your budget and financial situation.

Tips For Securing Land And Construction Loans

Getting approved for loans to buy land and build a new home is challenging, but possible if you take the right steps. Here are some tips that can help your loan applications go smoothly:

• Shop around – Compare rates and terms from multiple lenders to find the most affordable financing option that suits your needs. Local banks and credit unions are a good place to start.

• Know your budget – Get estimates for land purchase and construction costs and make sure they fit your budget. Lenders want to see you can afford the projects.

• Boost your credit – Aim for a credit score over 720. Pay down debts, correct errors on your credit reports, and pay all bills on time.

• Save for a down payment – Land and construction loans require larger down payments than mortgages. Save at least 20-25% of total costs for your down payment.

• Have all your documentation ready – Lenders will want to see plans, budgets, permits, and other detailed records showing your readiness to buy and build.

Is Buying Land And Building A House Right For You?

Constructing a home from scratch on land you purchase allows unlimited customization and your dream home design. But it’s a complex process requiring proper financing. Make sure you assess all the costs, risks, and financing options before deciding if buying land and building a house is feasible for your situation. With the right preparation and budget, you can make owning your perfect custom built home a reality.