Moving away from the city life’s hustle and bustle to build a custom home on acreage is a dream many share. Buy land, build a house, live happily ever after. While the concept is simple, the process can be daunting. We’d like to give you an overview of what it takes to make this dream come true.
First, you’ll need to purchase the land for your future homesite. Texas Farm Credit’s mortgage division can finance anywhere from 5 to 100 acres with the loan process basically remaining the same. Meaning you’ll need a minimum of 15 to 20 percent as a down payment, as well as cash to cover the closing costs.
Traditionally the next step after the land purchase is designing your home, selecting your builder, and obtaining a final construction bid. We encourage customers to spend time shopping builders to find the one that’s right for you. You’ll be working closely as they build your home, so you want to feel comfortable with their communication style, work ethic, and trustworthiness.
Once you find the right builder, it’s time to start building. To do that you, need to apply for an interim construction loan. Construction loans are typically set up to cover the project’s entire cost, including the land and home construction. To close on this loan, you’re responsible for another down payment and set of closing costs. Depending on the equity in your property, you may be able to roll the down payment and the closings cost in with your construction loan.
You should know that an interim construction loan is very unique – unlike traditional mortgage loans where the entire loan amount is advanced upfront to pay the sellers. Construction loans payout in draws. For instance, the first draw on your loan may be to pay off the existing land loan. Another example would be after pouring the foundation and completing framing, your builder would apply for a draw of funds to cover that cost.
The builder is responsible for draw requests and detailing expenses. You will review and approve the requests, and then Texas Farm Credit will advance funds directly to the builder. This will go on until construction is complete, and the total amount of your loan has been drawn.
Most mortgage companies will offer you a two-time close loan, but because Texas Farm Credit specializes in rural lending, we offer a one-time close option.
Two-time, one-time, what does all this mean? Don’t worry, I won’t leaving you hanging. On a two-time close loan, you’ll first apply for an interim construction loan, which may include a down payment and closing costs. Once construction is complete, you’ll apply for your final mortgage, which refinances your land and new home into one conventional mortgage loan. In that loan scenario, you may have some equity built up, which could benefit your loan terms, but closing costs are unavoidable.
But when you get the one-time close construction loan, you won’t have to apply for financing, pay closing costs, or go through the closing process again after the home construction is complete. You simply apply for one loan that covers the construction and final mortgage in a straightforward package.
To be considered for a one-time close, you will need your home plans and construction bid ready to go at the time of land purchase.
A one-time close comes with a host of benefits: you begin building equity in your property sooner, you can lock-in your interest rate at the beginning of the whole process, you’ll save the closing costs from the after-construction loan closing, and best of all – you won’t have to worry about figuring out financing again. You can just move in and enjoy your new home!
Buying a piece of land and building a home on it takes healthy cash reserves, determination, and a lender like Texas Farm Credit who can walk you through each step in the process and save you time and money with a one-time close.
We’ve outlined a standard case here, but each home is different, and we treat each mortgage customer with care and fresh eyes because each project is always unique. We’ll explain every detail, stay in communication all along the way, and make sure you get the best loan package to suit your needs.
Yes. There are multiple options that a lender may allow. One is to join the land loan with the new construction loan into one. However, paying off your land before building your house may help you earn more favorable loan terms for your construction loan.
You’ll need a construction loan to finance the actual build. Construction loans can be either one-time close or two-time close loans. You can learn more about how Texas Farm Credit finances these loans here.
Standard down payments vary. A typical down payment for Texas Farm Credit members is 20% of the total purchase price. Paying more than that will allow you to take out a smaller loan and pay less interest long-term.
Some buyers choose a lot location first, then build their house later. This allows them to secure a location they love early in the process, then spend some time saving money for construction and building equity in the purchased land.
Long-term, it could be more expensive to build a house from scratch on raw land rather than buying an existing house. If the land is undeveloped, you may have to pay for septic tank installation, a water well, electric line hookups, or new permit fees, for example. However, the benefit is that you get to choose exactly how your new home is built. For a full cost breakdown of building vs buying a house, learn more here.
The cost to buy land and build a house depends on your location and the specifics of the home to be built. Land prices vary quite dramatically across the country, while construction costs are slightly more consistent. Assuming average prices for components and services like architectural plans, site preparation, foundation, framing, plumbing and electric, interior finishing, and all associated permits, a 2,500-square-foot home would likely cost $300,000-$500,000.
We are not lawyers, accountants, or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up to date, but it may contain errors. Please be sure to consult a legal or financial professional before making any decisions.
When you’re looking to build your dream home one of the first steps is purchasing the land or lot where you’ll construct the house. But land can be expensive so how do you pay for it? Can you buy land with a construction loan?
The short answer is yes you can finance the purchase of land with a construction loan. Construction loans are specifically designed to cover both the cost of the lot as well as the building costs.
What Is A Construction Loan?
A construction loan is a short-term financing option meant to pay for the land and construction of a new home. It covers expenses like:
- Down payment on land
- Building materials
- Labor
- Permitting fees
- Other construction costs
With a construction loan, funds are issued in stages as certain milestones are reached during the building process. An inspector verifies progress before the lender releases money for the next phase.
Construction loans typically have variable interest rates, interest-only payments during the building period, and last around 6-12 months Once the home is finished, these loans must be converted into a traditional mortgage
Buying Land With A Construction Loan
One of the biggest advantages of construction loans is the ability to purchase vacant land or lots. The loan provides money upfront to cover the down payment on the lot.
Then, as you build the home, additional funds are disbursed to pay the builder. You don’t need to take out a separate land loan or pay for the lot in cash.
However, there are a few things to keep in mind:
-
The land purchase must occur simultaneously with obtaining the construction loan. You can’t buy a lot years in advance and expect to use the loan for just the building costs.
-
Construction usually needs to begin within 30-90 days of purchasing the land. Lenders want to see quick progress.
-
The loan amount must factor in both the cost of the lot as well as estimated building expenses.
-
Some lenders require a higher down payment if you’re purchasing land. Often 25-30% instead of the typical 5-10%.
Alternatives To Construction Loans
If you already own your lot outright, you can explore other construction financing options besides traditional construction loans.
For example, a renovation loan like the FHA 203(k) allows you to finance improvements on land you already own. You may also look into home equity loans or lines of credit.
That said, even if you have the land, a lender may still require you to take out a construction loan for building the home. The benefit is you may not need as much upfront cash for the down payment.
Tips For Buying Land
If you plan to purchase land with a construction loan, keep these tips in mind:
-
Find the lot and buildable house plans before applying for financing. Lenders will want to review specifics.
-
Work with an experienced loan officer familiar with construction lending. They can guide you through the process.
-
Be conservative with your budget and timeline. Projects often take longer and cost more than expected.
-
Have a contingency fund for unexpected overages and delays. These issues are common with new construction.
-
Understand the loan draw schedule and have realistic expectations for timing. Draws are not released all at once.
-
Be prepared to make interest-only payments during the building phase. This maintains your good standing with the lender.
-
Know the conversion process. Construction loans must become a traditional mortgage once the home is finished.
The Bottom Line
Construction loans are one of the few financing options that allow you to buy land and build at the same time. Just be sure to find an experienced lender and account for both the land and construction in your loan application. With proper planning, you’ll be well on your way to building your dream home.
About the AuthorJenny Zagst
Jenny Zagst joined the team in August 2012 as a charter member of the Texas Farm Credit Mortgage Division. With an extensive traditional real estate background, she can appreciate Texas Farm Credit’s unique ability to finance homes on acreage. Jenny enjoys horseback riding, hunting, fishing and being outdoors. As Tyler, Texas natives, she and her husband enjoy raising their son and daughter in the heart of East Texas.
Can I use my land as down payment for a construction loan?
FAQ
Is it better to buy land first and then build?
Should I pay off my land before you build?
What is the minimum FICO score for a construction loan?
Can I borrow against land I own?
Can you buy a home with a USDA construction loan?
A USDA construction loan enables you to purchase both the land and the house but there are restrictions. For instance, the land must be in a USDA-approved location. These areas must be ‘rural in character’, though many small towns and suburbs qualify. This is not a loan that you can use to purchase land now and build on it at a later time.
Can I finance a land purchase & construction for my home?
Yes, if you want to finance a land purchase and construction for your home, you can apply for a construction loan. This is a short-term loan covering the land, labor, materials and permits. Once your home is built, you’ll convert the loan into a mortgage to pay for the completed home.
Do I need a construction loan?
As with any loan, be sure to shop around so you can compare all of the offers available to you. 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.
Should I get a land loan or a construction loan?
If you have circumstances pushing your building project out a year or more (or you’re still getting your home plans together), a land loan is likely a better choice for you. While I, Rocket Mortgage, don’t offer land or construction loans, you can still qualify for a mortgage on a new-construction house.