Everything You Need To Know About Land and House Loans

Buying land and building a house from scratch can be an exciting prospect. You get to design and build your dream home exactly how you want it However, it also comes with its challenges, especially when it comes to financing. Land and house loans allow you to buy the land and finance the construction of your new home all in one loan

In this comprehensive guide, I’ll explain everything you need to know about land and house loans, including:

• What are land and house loans?
• How do land and house loans work?
• Types of land and house loans
• Pros and cons of land and house loans
• Eligibility and requirements
• The process of getting a land and house loan
• Tips for getting approved
• Alternatives to land and house loans
• FAQs

Let’s get started!

What Are Land and House Loans?

A land and house loan, also known as a lot and construction loan, allows you to purchase land and build a house on it. It combines the financing for both the land purchase and construction of a new home into one loan.

These loans are offered by banks, credit unions, and mortgage lenders. With a land and house loan, you don’t have to take out separate loans for the land and then the construction. Everything is wrapped up into one mortgage loan.

Land and house loans require you to make a down payment, typically 10-20% of the total loan amount. The loan amount will cover purchasing the land as well as all construction costs to build your home.

Once construction is complete, the land and house loan converts into a traditional fixed-rate mortgage. You’ll then make monthly payments towards your principal and interest just like with any other home loan.

How Do Land and House Loans Work?

Here is an overview of how land and house loans work:

• Find and purchase land – First, you have to purchase a vacant plot of land. The land and house loan will finance this purchase as part of the total loan amount.

• Loan approval – You apply and get approved for a land and house construction loan based on your finances, credit, debt-to-income ratio, and other eligibility requirements.

• Make a down payment – You’ll likely need to make a 10-20% down payment on the total loan amount upfront. This covers both the land purchase price and estimated construction costs.

• Draw loan funds during construction – As construction progresses, you request funds from the lender to pay contractors. The lender distributes money in stages based on completed work.

• Construction completes – Once construction is done and you obtain a certificate of occupancy, the loan converts into a fixed-rate mortgage.

• Make mortgage payments – You begin making regular principal and interest payments on your mortgage for the usual loan term, often 30 years.

Types of Land and House Loans

There are a few different types of land and house loan programs available:

• One-time close loans – This is the most common type. Everything (land purchase, construction, permanent mortgage) is wrapped up in one loan that you close on upfront.

• Two-time close loans – With this option, you get separate loans for the land purchase and then construction. The construction loan converts to a mortgage after building completes.

• Government land and house loans – The USDA offers land and house loan programs for eligible borrowers in rural areas. These come with lower down payments and interest rates.

• Adjustable-rate mortgages (ARMs) – Some lenders offer land and house loans with adjustable rates that change over time rather than fixed rates.

One-time close loans offer the simplest process, while two-time close loans allow more flexibility. Government programs help eligible borrowers, while ARMs come with more interest rate risk.

Pros of Land and House Loans

There are many benefits that come with using a land and house loan:

• One loan for everything – It’s convenient to have the land purchase and construction wrapped up in one loan rather than getting separate financing.

• Fixed rates – Land and house loans often come with fixed interest rates, protecting you from rate hikes during construction.

• Predictable payments – Having a fixed loan rate also makes your future mortgage payments predictable.

• Potentially lower downpayment – Some land and house loans only require 10% down, lower than the typical 20% downpayment.

• Can build your dream home – These loans make it possible to fully customize and build your ideal home.

• Mortgage interest deductions – You may be able to deduct mortgage interest on your taxes, which you can’t do with a typical construction loan.

In short, it simplifies the process, comes with rate/payment stability, and gives home customization flexibility.

Cons of Land and House Loans

However, there are also some potential downsides with land and house loans to consider:

• High costs – Land and house loans require a lot of upfront costs, including land purchase, downpayment, and construction. The total loan amount is higher.

• Tight qualification – It can be more difficult to qualify for these loans compared to a typical home purchase loan or construction loan alone.

• More complex process – You have to purchase land, manage contractors, coordinate construction, and convert to a mortgage. It’s more complicated than just buying an existing house!

• Builder experience is key – If you use an inexperienced builder, you risk construction delays, shoddy workmanship, or even non-completion.

• Contingency funds required – You need contingency funds for going over budget or handling unforeseen costs that pop up during construction.

• No rate locks – Unlike a mortgage, most land and house loans don’t allow you to lock in an interest rate in advance. Rates could rise during construction.

Make sure you take these cons into account before committing to build a custom home with this type of financing.

Land and House Loan Requirements

What does it take to qualify for a land and house loan? Here are some key eligibility and requirements:

• Good credit – Exact score requirements vary by lender, but you typically need a minimum credit score around 640-680. Higher scores get better rates.

• Sufficient income/DTI – Your debt-to-income ratio (DTI) needs to be 43% or lower in most cases. Lenders want to see you can afford loan payments.

• Down payment funds – You’ll need around 10-20% of the total loan amount for a down payment. Down payments as low as 5% may be possible.

• Construction plans – Detailed house plans and a fixed-price contract with your builder are usually required. This guarantees what’s being built and at what cost.

• Contingency fund reserves – Many lenders require you to have a set aside a contingency fund for unexpected overages during construction, often 10-20% of build costs.

• Low debt – The lower your existing debts (credit cards, auto, student loans, etc), the more likely you’ll get approved. High total debt hurts.

Meeting typical mortgage credit and income requirements is key, along with having the necessary down payment funds and a solid construction plan and budget.

How to Get a Land and House Loan

If you’re ready to move forward, here are the step-by-step instructions for getting a land and house loan:

1. Find land – Research and locate land for sale in the area you want that will work for building. Get pre-approval from the locality confirming it’s suitable to build on.

2. Choose house plans – Work with an architect to design home plans and blueprints that fit your budget. Get a materials list and projected costs.

3. Select a builder – Thoroughly vet and choose a reputable home builder with great references and examples of completed projects similar to yours. Get a contract.

4. Talk to lenders – Meet with banks, credit unions, or mortgage brokers to discuss land and house loan programs and interest rates. Compare options and offers.

5. Apply for financing – Formally apply for the loan once you select a lender. Be ready to submit all required financial and construction documentation.

6. Close on land – If approved, you’ll close on the land purchase first. The loan money will be dispersed to the land seller at this closing.

7. Start construction – With the land purchased, you can now break ground and start construction! The lender will release additional funds incrementally as work progresses.

8. Construction completes – Once your certificate of occupancy is issued, construction is officially done! Now it’s time to convert the construction loan into your permanent mortgage.

9. Make mortgage payments – You’ll begin making your scheduled monthly mortgage payments. Congrats, you built your dream home with a land and house loan!

This covers the entire process from start to finish. It