How to Get a Loan to Buy Land and Build a House From Scratch in 2024

Buying land and building a custom home from the ground up can be an exciting and rewarding experience You get to design every detail and end up with your dream home on your ideal property. But financing the purchase of vacant land along with the construction can be challenging. A construction loan allows you to buy the land and pay for all costs associated with building a new house.

I did extensive research into the different types of loans, lenders requirements, rates, and steps involved in securing financing to buy land and build a house. In this comprehensive guide, I will walk you through everything you need to know about getting a loan to buy land and build a custom home in 2024.

Overview of Loan Options for Land and Construction

There are several loan options you can consider to finance the purchase of land and construction of a new home from scratch:

• Construction Loans – This is the most common type of loan for buying land and building a home. It covers purchase of the land and all construction costs.

• Land Loans – Finances only the purchase of the vacant land. You’d need separate financing for the building phase.

• USDA Loans – Government-backed loans that can cover land purchase and construction in eligible rural areas.

• VA Loans – Options for veterans to finance land and building costs with no down payment.

• FHA 203k Loan – Government loan that can finance buying land and building in one loan.

• HomeStyle Renovation Mortgage – Conventional loan option to buy land and build.

Below I’ll provide an in-depth look at the pros and cons of each loan type for land and construction.

Construction Loans Explained

A construction loan, also called a construction-to-permanent loan, is the most common financing choice for buying land and building a home. It is a short-term loan that covers both the land purchase and costs to build the house.

How Construction Loans Work

With a construction loan, you only have to go through one loan process and closing. Here’s an overview of how these loans work in three stages:

1. Closing and Initial Draw – At closing, the lender provides an initial disbursement to purchase the land.

2. Construction Phase – The lender pays out the rest of the loan amount in installments as construction milestones are met.

3. Conversion to Mortgage – Once construction is complete, the construction loan converts into a permanent traditional mortgage.

Construction loans provide ongoing access to financing throughout the building phase, ensuring you don’t run out of funds before the home is finished.

Requirements for Construction Loans

Construction loans have stricter eligibility standards compared to conventional mortgages. Common requirements include:

• Credit score – Minimum 620 FICO score is typical

• Down payment – Expect to make a down payment of 10-20%

• Loan-to-value ratio – The loan amount is based on the completed home value, usually 80% LTV.

• Construction experience – Most lenders require you to have a proven general contractor.

• ** Contingency fund** – You may need 10-20% of the total costs set aside for unexpected overages.

• Permits and plans – Building permits and final plans are usually required before closing.

As you can see, construction loans come with more rigid criteria compared to buying an existing home with a conventional mortgage. Make sure you meet all the requirements before applying.

Interest Rates on Construction Loans

Construction loans typically come with higher interest rates than standard mortgages. There are two main options:

• Variable rates – The rate floats and adjusts monthly during construction. The variable rate is usually around 0.5-1% higher than fixed mortgage rates.

• Fixed rates – The rate is locked in for the entire construction period. Fixed rate construction loans have interest rates comparable to a traditional mortgage.

The fixed rate option provides certainty, avoiding unpredictable rate hikes during construction. But you’ll pay a higher rate to lock it in upfront compared to a variable loan.

Construction Loan Lenders

Many local and national lenders offer construction loans, but they can be trickier to find than conventional mortgages. Large banks typically don’t offer these specialized loans. Here are some top construction loan lenders:

• Local credit unions
• Community banks
• Online lenders like Lenda and LoanDepot
• National lenders like Wells Fargo and Chase

Working with an experienced construction loan lender is key. Ask prospective lenders how many of these loans they close each year. The more cases they handle, the smoother the process will be.

Land Loans Explained

If you plan to pay cash for construction costs, another option is taking out a land loan just to finance the purchase of the vacant property.

How Land Loans Work

With a land loan, you receive financing just for the raw land purchase. The features and repayment terms vary by lender, but generally:

• Down payments range from 10-25%
• Land is used as collateral
• Term lengths up to 15 years

Once you purchase the land, you would need to secure separate financing for the home building, whether through cash or another construction loan or mortgage.

Requirements for Land Loans

Since there is no home serving as collateral with a vacant land loan, qualifying can be challenging. Typical requirements include:

• Credit score – Minimum 620, often 640+ required

• Down payment – Expect to put down 15-25%

• Debt-to-income ratio – Maximum 43% DTI is common

• Loan-to-value ratio – Maximum 85% LTV based on the land value

• Appraisal – The lender will order an appraisal of the vacant land

Unless you have pristine credit and meet all requirements, land loans can be difficult to qualify for. Make sure you meet eligibility criteria before applying.

Interest Rates on Land Loans

The interest rate on a land loan is usually 1-2% higher than conventional mortgage rates since it is riskier for lenders with no home as security. Expect land loan rates around 5-7% currently.

The term length you qualify for also impacts your rate. Shorter repayment terms of 1-5 years come with lower rates. Going up to a 10-15 year repayment term will mean a higher interest rate.

Where to Get Land Loans

Land loans are offered by some banks, credit unions, and online lenders. However, not all lenders provide land financing options. Here are some top places to find land loans:

• Farm Credit institutions
• Small community banks and credit unions
• Online land loan lenders like LendingHome and LandLoans.com

Research multiple lenders to find the best land loan rates and terms for your scenario.

FHA 203k Loan for Land and Construction

One government-backed financing option that allows you to buy land and build in one loan is the FHA 203k loan.

How the FHA 203k Loan Works

This is an FHA-insured mortgage that covers purchase of the land along with construction costs for the new home. It provides one closing and consolidates land financing and construction funds.

Up to $35,000 in construction costs can be financed in regular 203k loans. For larger projects, the 203k Streamlined Option covers up to $200,000 in building expenses.

FHA 203k Loan Requirements

To qualify for an FHA 203k loan for land and construction, you’ll need:

• Credit score of at least 620

• Total debt-to-income ratio below 43%

• Down payment as low as 3.5%

• Contingency reserve of 10-20% of construction costs

FHA 203k loans offer more lenient credit guidelines than conventional construction loans. This makes them a good option if you want to buy land and build but have marginal credit or limited funds.

Interest Rates on 203k Loans

The FHA caps the maximum interest rate lenders can charge on 203k loans used to buy land and build. As of 2024, the rate cannot exceed around 5.25% based on current market rates.

So 203k loans may come with better rates than conventional construction loans or land loans. The FHA protections ensure affordable financing for land purchase and construction costs.

USDA Loans for Land and Home Building

For building a home in eligible rural areas, USDA loans allow you to buy land and finance construction through one loan with 100% financing and no down payment required.

How USDA Loans Work

USDA Section 502 Direct Loans are available for buying land and building a home in designated rural counties across the country.

With these USDA loans, you can consolidate the land purchase, construction, equipment, labor, and other costs into one loan. No down payment is required and the program offers below market interest rates.

Requirements for USDA Loans

To qualify for a USDA loan to build, you’ll need:

• Minimum credit score of 640
• Income