Howdy! Building on your own land is the dream many have, and here at Texas Farm Credit we love making the dream come true. I’d like to take some time and share about our noteworthy construction loans.
Our construction loans provide customers with many options to make the process accommodating and seamless. To give you a good understanding of what we offer I will highlight some of the key advantages of working with Texas Farm Credit to finance your construction.
We offer a one time construction close, meaning that we will close on a construction loan and the permanent financing in one go. This one time construction product has several significant advantages. First, we can use land equity. This means that if you own your land you can use its value as collateral towards the loan, which for some people can be a great perk.
The rates that we offer are also extremely competitive, making it an especially great advantage because your rate will stay the same through the construction into permanent financing. In a world full of changes we mitigate these worries of rising rates.
Unlike traditional lenders that offer interest only in term loans, with Texas Farm Credit you will immediately start making principal payments once you close. So as your builder takes straws your payment will climb up to your final payment.
We also use an online software for draws called Build. This makes the draw process streamlined and very convenient for both you and your builder. We also don’t limit our customers to an approved set of draws, those decisions are your call.
Last, one more noteworthy advantage is that we can finance barns, pools and shops along with the construction of a home. This keeps everything funded from one simple spot.
It is also highly important for you to know who you’re working with and why you’re working with them. For this reason I’d like to touch on some key advantages of working with Texas Farm Credit and Rural 1st.
First, we work and live in rural communities. We genuinely understand the intricacies of financing properties in the country and have experienced them first hand. So while we have expert knowledge in this area we also have the experience to back that knowledge up.
For those who are less interested in more modern standard homes and what unique options we can accommodate, whether it is a barn home, log cabin, barn dominium or metal home we finance the build or purchase of unique country homes.
We also offer conversion and amortization tools to our customers. These tools can be super useful so be sure to ask your loan officer how they benefit you.
Now I’d love to set expectations with some important things to remember regarding our loan process.
We need at least 85% loan to value on all construction loans. We also have limited options for self contractors and encourage customers to have a general contractor overseeing the project.
Now I want you to know if you don’t already have land to build on we offer lot loans that can be rolled into a construction loan when you are ready to build.
Ultimately, as with many of our farm credit rules, we have certain guidelines we must abide by regarding acreage minimums, house costs, loan to value, et cetera. It’s important to have a conversation with your loan officer to be sure they have a full understanding of your specific goals and situation.
Texas Farm Credit can help you build your home on acreage of any size. We offer competitive rates and a variety of down payments and terms. Learn more about construction and homesite loans.
With all this in mind we hope the overview of our construction loans has been both helpful and encouraging. We want you to have all the support that you need to build a home for you and your family, and we look forward to hearing from you.
Building a custom home is an exciting endeavor, but it also requires careful planning and financing. One of the first decisions homeowners face is whether to use their land as collateral when taking out a construction loan. Land can provide significant equity to put toward the project, but there are also risks to consider. This article provides a comprehensive overview of using land as collateral for construction loans.
How Construction Loans Work
Construction loans are short-term loans designed to finance the building of a new home. The loans provide periodic payments to the builder as certain stages of construction are completed. At the end of the building process, the construction loan converts into a traditional mortgage.
There are two main types of construction loans
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Single-close construction loans – Also known as all-in-one or construction-to-permanent loans. These combine the construction loan and mortgage into a single loan with one application process, interest rate, and closing date.
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Two-close construction loans – The construction loan and mortgage are completely separate. Homeowners must reapply for the permanent mortgage once construction is finished.
Construction loans typically have higher interest rates and require a down payment of 25-30% of the total project cost. The land used for the home can count toward this down payment amount if used as collateral.
Using Land as Collateral
If homeowners already own the land they plan to build on, they may be able to use it as collateral for a construction loan. This allows them to leverage the land’s equity and avoid making a large down payment out-of-pocket.
There are a few requirements for using land as collateral:
- The land must be owned free and clear, with no existing mortgages or liens.
- The land must appraise high enough to cover the required down payment amount.
- Lenders generally require a 75-80% combined loan-to-value ratio or less.
For example, if the land is worth $100,000 and the construction project totals $300,000 the land appraises for 33% of the total project value. This may be enough to cover the required 25-30% down payment.
Benefits of Using Land as Collateral
Using land as collateral provides several advantages for homeowners:
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Leverages existing equity – Land often represents homeowners’ largest asset Using its value as collateral allows homeowners to access that equity,
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Avoids large down payment – Homeowners can put less money down up front and free up other funds for construction.
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Potentially lower interest rate – More equity results in less risk for lenders, potentially leading to a lower interest rate.
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Streamlined process – With a single-close loan, homeowners go through one application process versus two with a separate construction loan and mortgage.
Risks of Using Land as Collateral
While using land collateral provides significant benefits, homeowners also take on additional risk:
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Risk of default – If homeowners default on the loan, the lender may force the sale of the land to recover their losses.
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Delayed financing – Lenders may delay financing until the land is appraised to determine available equity.
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Variable appraisal values – Land appraisals may come in lower than expected, jeopardizing loan approval.
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Changing lot lines – Existing lot lines may need to be redrawn before construction if they don’t match building plans.
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Unknown conditions – Environmental factors or undisclosed property defects could limit building potential.
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Zoning restrictions – Local zoning laws may prohibit certain design elements.
Homeowners should carefully weigh these risks before moving forward. Consulting with a real estate attorney is highly recommended.
Loan Qualification and Application Process
When using land as collateral, homeowners should still expect to go through the typical loan application and approval process. Lenders will evaluate:
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Credit score and history – Good credit increases chances of approval and secures better loan terms.
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Income and assets – Stable income and healthy finances ensure ability to repay the loan.
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Debt-to-income ratio – Total debt compared to income should not exceed 40-50% for most borrowers.
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Loan-to-value ratio – Compares loan amount to total project value. Most lenders require 75-80% or less.
In addition to standard documents like tax returns and pay stubs, the lender will require:
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Land deed and title report – Proves ownership and identifies any existing liens.
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Land appraisal – Determines available equity to be used as collateral.
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Building plans – Architectural designs showing home specifications.
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Budget and timeline – Detailed cost breakdown and construction schedule.
Shopping different lenders to compare interest rates and terms is highly recommended. An experienced loan officer familiar with construction lending can guide homeowners through the process.
Alternatives to Using Land as Collateral
Some options exist if homeowners are unable or choose not to use their land as collateral:
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Save a larger down payment – Cover the down payment in cash rather than land equity.
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Take out a home equity loan – Use equity from an existing home as a down payment resource.
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Explore alternate financing – Crowdfunding or private/hard money loans may provide more flexible options.
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Lease the land – Paying land lease fees can be less risky than putting up the land as collateral.
Each alternative has its own pros and cons to weigh carefully before making a decision.
Key Takeaways
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Using land as collateral allows homeowners to access their property’s equity to help finance construction. This can minimize the amount of cash needed up front.
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Land must be owned free and clear and appraise high enough to meet the lender’s loan-to-value ratio requirements. Zoning and title should also be clear.
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Benefits include leveraging equity, avoiding large down payments, and potentially securing better loan terms. Risks include default, changing appraisals, and unknown site conditions.
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The loan application process is similar to a traditional mortgage but includes additional documents like land deeds, building plans, and construction budgets.
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For those unable or unwilling to use land as collateral, saving a larger down payment or exploring alternate financing options are possible alternatives.
With careful planning and preparation, using land as collateral can be an effective strategy to help finance the construction of a new custom home. Consulting with real estate and legal professionals is highly recommended to fully understand the risks and requirements in your specific situation.
About the AuthorBrooke Bevill
Brooke graduated from Texas A&M University with a bachelor’s degree in Communications with a minor in Agricultural Leadership. She began as an intern at TFC in 2019. Growing up she was involved in her local 4-H and FFA club where she raised and sold broilers. In her free time she enjoys traveling, spending time with family and friends, and outdoor activities.
Can I use my land as down payment for a construction loan?
FAQ
Can I use land I own as collateral for a mortgage?
Should I pay off my land before you build?
What does my credit score need to be for a construction loan?
What loan requires property to be used as collateral?
Can land be used as collateral?
The most common use of land collateral is for a land equity loan. Land can also be used as collateral for a personal loan, which can be used for almost anything. Land equity loans work similarly to home equity loans; they use the equity of the land you own to borrow against.
Can a home be used as collateral for a construction loan?
When you are ready to build on already purchased land or if you want to buy a lot and build right away, you will need to apply for a construction loan. If you already own the land, the equity can be used as collateral to help finance a construction loan, or you may also be able to use a current home as collateral.
Does a home loan accept land as collateral?
Prefabricated and Manufactured Home Loans Some lenders will accept land as collateral provided the land has equity value that meets a certain percent of the sales price and the land is free and clear of all existing liens. The amount of equity required is based on the borrower’s creditworthiness, the loan program applied for and other factors.
How do I secure a collateral loan?
One way to secure a collateral loan is by using any land you own, including construction loans and even personal loans, if the lender approves you. To use the land as collateral, the land must have an equity value that is equal to or exceeds that of the loan amount. You must own it outright unless it is specifically a land loan.