Land and Home Loans: Everything You Need to Know

Buying land and building a home from the ground up is an exciting prospect for many prospective homeowners. However, it can also be a complex process involving multiple phases of financing. Land and home loans are an efficient financing option that combines the mortgage for the land purchase and home construction into a single loan.

In this comprehensive guide, we’ll cover everything you need to know about land and home loans, including:

• What are land and home loans?
• How do land and home loans work?
• Types of land and home loans
• Pros and cons of land and home loans
• Eligibility and requirements
• The process of getting a land and home loan
• Tips for securing financing

What are Land and Home Loans?

A land and home loan, also known as a one-time close construction loan, is a mortgage product that combines the financing for both the land purchase and home construction. It wraps the costs for the land, construction, permits, fees, and other associated expenses into a single loan.

With a land and home loan, you only need to close on the mortgage once This streamlines the process and can save you time and money compared to closing on separate loans for the land and then the home construction

Land and home loans require just one application and underwriting process. You work with one lender and make a single monthly mortgage payment that covers everything.

How Do Land and Home Loans Work?

Land and home loans work by providing all the necessary financing upfront through a single lending process. Here are some key details on how these specialized mortgage products work:

• Down payment – You will need to make a down payment usually 10-20% of the total costs for land and home construction.

• Loan amount – The loan amount covers purchase of the land as well as all costs associated with building the home including materials labor, permits, fees, etc.

• Interest rate – Land and home loans typically have slightly higher interest rates than traditional mortgages. Rates vary by lender.

• Loan term – Repayment terms are generally between 15-30 years. Longer terms have lower monthly payments.

• Draws – The loan funds are disbursed incrementally as certain stages of the home building are completed.

• Single closing – You only go through one closing process for both land and home.

• One monthly payment – Your monthly mortgage payment goes toward repaying the single loan for everything.

Types of Land and Home Loans

There are a few different types of mortgage products that combine land and construction financing:

• Single-close construction loans – This option offers one-time closing for land and home building costs. You receive the full loan amount upfront and make draws as needed.

• Two-time close construction loans – These involve separate closings for the land and then home construction, but are facilitated by a single lender.

• All-in-one construction loans – This combines land purchase, construction loan, and permanent traditional mortgage into one loan with a single closing.

The single-close loan is the simplest and most efficient option for financing land and home construction together. However, two-time close loans allow you to lock in your permanent mortgage rate at the outset.

Pros and Cons of Land and Home Loans

Land and home loans offer several advantages over securing separate financing, but also have some potential downsides to consider:

Pros

• One closing process
• Wrap multiple costs into one loan
• Only need to qualify once
• Make a single monthly payment
• Lock in rates for land and construction
• Easier to manage than multiple loans

Cons

• Higher interest rates than traditional mortgages
• Large loan amounts increase financial risk
• Missed draws can put loan into default
• Need to pay interest during construction
• Complex process for first-time home builders

As with any major financial decision, it’s important to weigh the pros and cons based on your specific situation. Speak with a loan officer to determine if a land and home loan is the right choice for you.

Eligibility and Requirements

The eligibility requirements for land and home loans are similar to traditional mortgage products, but often a bit stricter given the increased lending risk. Here are some typical requirements:

• Down payment – Expect to put 10-20% down for the combined costs of land and construction. Some lenders may accept as little as 5% down.

• Credit score – You’ll need a strong credit score, generally 640 or higher. The better your credit, the more favorable the loan terms will be.

• Debt-to-income ratio – Your total monthly debt payments, including the new mortgage, should not exceed 43% of your gross monthly income.

• Loan-to-value ratio – The loan amount will be based on appraisals for land value and projected home value. Loan-to-value ratios up to 80% are common.

• Construction plans – Detailed plans for home design, floor plans, and a budgeted construction schedule are required.

Be sure to confirm specific qualifications with individual lenders, as they can vary. It also helps to get pre-approved so you know your budget for land and construction costs.

The Process of Getting a Land and Home Loan

Getting approved for a land and construction loan requires much more preparation, paperwork, and oversight compared to a traditional mortgage. Here are the basic steps:

• Determine budget and construction plans
• Review qualifications and loan options
• Select lender and apply for pre-approval
• Find suitable land and estimate build costs
• Provide land appraisal, titles, surveys, and plans
• Submit loan application with all required documents
• Lender reviews application and provides tentative approval
• Close on loan and receive access to draw funds
• Make scheduled draws as construction stages are completed
• Final inspection and move into new home!

Expect the entire process to take 6-12 months from loan application to finalizing construction. The key is working closely with your lender and general contractor throughout the building phase.

Tips for Securing Financing

If you’re considering applying for a land and home loan, keep these tips in mind to improve your chances of approval:

• Shop around with multiple lenders to compare loan products, rates, and terms. Local banks and credit unions often offer these specialized loans.

• Put at least 20% down if possible. Higher down payments reduce the lender’s risk.

• Review your credit report and improve your score. Pay down debts and correct any errors.

• Choose home plans within your budget. Avoid overly expensive custom designs.

• Hire a professional general contractor with proven experience successfully managing new construction projects.

• Get cost estimates from contractors early and build in contingencies for unexpected expenses.

• Be ready to document your financials, including income, assets, debts, and cash reserves.

• Ask about “construction-only” loans if you plan to sell the home upon completion rather than live in it long-term.

With thoughtful planning and attention to detail, a land and home loan can be an effective way to finance your dream home build. Just be sure you understand the entire process and evaluate your homebuilding readiness before diving in.

The Bottom Line

Land and home loans allow you to buy land and build a custom home through a streamlined one-time closing mortgage process. These specialty loans make new construction more accessible and affordable by rolling all costs into one loan with a single monthly payment. Just be sure to weigh the pros and cons carefully when deciding if this option fits your homebuying goals and financial circumstances.