Everything You Need To Know About Buying Land To Build A House Loan

Buying land to build your dream home can be an exciting yet complicated process Securing financing to purchase the land and construct the home is one of the biggest steps That’s where a buying land to build a house loan comes in. This type of loan provides the funding needed to buy the land and build a custom home from the ground up.

In this comprehensive guide we’ll walk through everything you need to know about buying land to build a house loans. We’ll cover how they work, loan requirements costs and fees, and tips for getting approved. Let’s dive in!

What Is A Buying Land To Build A House Loan?

A buying land to build a house loan is a specialty financing product used to purchase vacant land and construct a new home on it. It combines the financing of the land purchase and home construction into a single loan. This type of loan goes by several names:

• Land and construction loan
• Land acquisition and construction loan
• Land purchase construction loan
• Vacant land loan with construction financing

No matter what it’s called, the purpose is the same. It provides the funds to buy the land and build a custom home tailored to your needs.

With a buying land to build a house loan, you’ll work with a lender to secure financing for the land first. Once the land is purchased, the loan will disburse additional funds in phases to pay contractors during the home building process.

How Does A Buying Land To Build A House Loan Work?

Buying land to build a house loans have a unique process compared to regular home purchase mortgages. Here are the key steps:

Step 1: Apply for pre-approval

Before looking for land, get pre-approved by providing information about your finances to the lender. This shows sellers you’re serious.

Step 2: Find the perfect land

Work with a real estate agent to identify land that fits your criteria. Make sure it’s suitable for building.

Step 3: Make an offer and secure land contract

Make an offer on the land and negotiate terms. Use contingencies to protect yourself.

Step 4: Initial land loan closes

The lender provides financing to purchase the land under the terms you’ve negotiated.

Step 5: Finalize house plans

Work with an architect and builder to design the home and create final plans.

Step 6: Obtain construction loan

The construction portion of your loan is funded to start building once plans are finalized.

Step 7: Home is built

Funds are disbursed in phases to the builder during the construction period.

Step 8: Construction loan converts to mortgage

Once home construction is complete, the loan converts into a traditional fixed-rate mortgage.

As you can see, there are many additional steps compared to buying an existing home. The entire process can take 6 months to a year or more.

What Are The Requirements For Buying Land To Build A House Loans?

Buying land to build a house loans come with stricter eligibility standards compared to normal mortgages. Here are some common requirements:

• Down payment – Expect to put down 20-25% of total costs
• Credit score – Most lenders require a minimum score of 680
• Debt-to-income ratio – Your DTI will be scrutinized, below 43% is ideal
• Construction experience – Prior building projects are preferred but not required
• Contingency fund – Have 10-20% extra cash for unexpected overages

In addition, you’ll need to have home plans ready and a licensed general contractor lined up. Meeting these requirements shows lenders you’re prepared.

What Are The Pros And Cons Of Buying Land To Build A House Loans?

There are both advantages and disadvantages to take into account with these specialized loans:

Pros

• Build a custom home to your specifications
• Potentially lower long-term costs than buying existing home
• Brand new construction with latest features
• Energy efficiency and layout designed for your needs
• Opportunity to create equity by building

Cons

• Higher upfront costs for land purchase
• Stricter lender requirements compared to normal mortgages
• Much longer process than buying an existing property
• No guarantee home will appraise for the build cost
• Financial risks if project goes over budget

As you can see, there are lots of tradeoffs to weigh when considering this type of loan. Make sure your finances and lifestyle are suited for the process.

What Are The Costs And Fees For Buying Land To Build A House Loans?

Beyond the costs to purchase the land and build the home itself, you’ll also incur fees for the loan. Here are some common fees to expect:

• Origination fee – Up to 2% of the total loan amount
• Application fee – $50 to $500
• Processing fee – $200 to $300
• Underwriting fee – $500 to $1,500
• Appraisal fee – $300 to $600
• Credit report fee – $20 to $50 per person
• Construction inspection fees – $200 per inspection
• Loan conversion fee – $500 when loan converts to permanent mortgage

Shop around with multiple lenders, as costs can vary. Also ask lenders if they offer discounts for buying down the interest rate.

Tips For Getting Approved For A Buying Land To Build A House Loan

Since approval standards are strict, here are some tips to boost your chances:

• Pay down existing debts – Reduce credit card balances and other debt obligations.

• Save up for a larger down payment – Putting down 20-25% shows lenders you’re financially ready.

• Keep your credit score high – Take steps to get your credit score over 700.

• Start the loan process early – Get pre-approved 6-12 months before buying land.

• Provide detailed construction plans – Have blueprints, budgets, permits lined up.

• Shop around with lenders – Compare rates, fees, and loan options from multiple lenders.

• Get pre-qualified for a mortgage – This provides a backup plan if the construction loan falls through.

Following these tips sets you up for success in getting approved and avoiding roadblocks.

Questions To Ask Lenders When Applying For A Buying Land To Build A House Loan

As you go through the application process, here are some key questions to ask lenders:

• What are your credit score and down payment requirements?
• What loan terms and rates do you offer?
• How much can I borrow based on my financial details?
• What fees and closing costs should I expect to pay?
• Do you finance both the land purchase and construction?
• What happens if construction goes over budget?
• How are funds disbursed during the building phase?
• What experience do you have with these types of loans?
• Who handlesinspections and draw disbursements?
• How long does the entire process typically take?

Asking these questions upfront ensures you pick the right lender for your needs and avoid surprises.

Alternatives To Buying Land To Build A House Loans

If you don’t qualify for a buying land to build a house loan, here are a few alternative options to consider:

• Owner financing – Some land sellers may finance the land purchase directly.

• Personal loan – A personal loan is simpler to qualify for than construction financing.

• Home equity loan – If you have equity in an existing home, you can tap into it to fund the land purchase.

• 401(k) or IRA loan – You can borrow against your own retirement savings without a credit check.

• Family gift or loan – Get help from family members to fund either the land, construction, or both.

• Traditional construction loan + land loan – Secure separate financing for the land and construction.

• Buying a fixer-upper – Purchasing a home needing renovations can be cheaper.

Keep in mind the risks and costs when exploring these options. Do your diligence to make sure they make financial sense.

5 Key Factors To Research Before Purchasing Land To Build

If you’re hoping to move forward with buying land to build a house, make sure to thoroughly research these factors:

Permitting and Zoning Laws – Ensure residential construction is allowed on the land. Get all necessary permits.

Utility Access – Confirm that water, electric, sewer and other utilities can be connected.

Environmental Issues – Inspect for potential hazards like underground oil tanks, asbestos, lead, etc.

Access Rights – Ensure you have legal rights to access the property via roadways.

Codes and Covenants – Check for any codes or neighborhood rules that restrict what you can build.

Vetting these critical items in advance protects you from nasty surprises down the road.

Is Buying Land To Build A House Right For You?

While rewarding, buying land to build a house is not an easy