The Complete Guide to Land Purchase and Construction Loans

Buying land and building a home from the ground up can be an exciting and rewarding experience However, financing the purchase of the land and the construction of the home requires a unique type of loan a land purchase and construction loan This type of loan allows you to buy land and build a home on it, while only needing to qualify and close once.

What is a Land Purchase and Construction Loan?

A land purchase and construction loan, also known as a one-time close construction loan, is a mortgage product that lets you buy land and build a new home in a single transaction with one loan and one closing This type of loan covers both the purchase price of the land as well as the construction costs to build a home on the property.

With a land purchase and construction loan

• You only go through the mortgage application and approval process once.
• You pay closing costs just one time.
• You lock in your interest rate upfront for the entire loan term.
• You make one monthly payment that covers principal, interest, taxes, and insurance.

Essentially, this loan product combines a lot loan with a construction loan into one tidy package. It provides simplified financing to buy land and build a custom home.

How Does a Land Purchase and Construction Loan Work?

Land purchase and construction loans are a bit different from other types of mortgages in how they are structured:

• Down payment – Most lenders require a 10% to 20% down payment on the total cost of the land plus the home construction.

• Two phases – The loan is broken out into two phases: the land purchase phase and the construction phase.

  • During the land purchase phase, the lender provides financing to buy the lot on which you’ll build.

  • Once you own the land, the construction phase kicks in to cover the costs to build the home.

• One closing – Even though there are two phases, you only go through one closing for the entire loan. This saves time and money on closing costs.

• Interest-only payments – You’ll make interest-only payments on the loan during the construction phase. This keeps payments low while your home is being built.

• Fixed rate – Land purchase and construction loans come with a fixed interest rate that is locked in upfront for the entire 30-year term.

• Convert to permanent loan – Once construction is finished, the loan converts to a permanent residential mortgage. At this point, your monthly payments include principal and interest to pay off the loan over time.

Pros and Cons of Land Purchase and Construction Loans

Let’s look at some of the key advantages and disadvantages of using a land purchase and construction loan.

Pros:

• One loan, one closing – You don’t have to shop for and close on separate loans.
• Locked interest rate – Your rate is secured upfront for the full mortgage term.
• Interest-only payments – Keeps payments low during construction.
• Custom-built home – You can build the house you want.
• Potentially lower costs – Combining the purchase and construction keeps costs down.

Cons:

• Large down payment – You’ll need 10-20% down, more than a typical mortgage.
• Timing constraints – The loan has deadlines for starting and finishing construction.
• No interest paid on deposits – You don’t earn interest on your down payment.
• More complex process – It’s more complicated than getting a regular mortgage.
• Late fees – You may incur late fees if construction goes past the allotted time.

As you can see, there are good reasons to get a land purchase and construction loan but also some potential drawbacks to consider.

Land Purchase and Construction Loan Requirements

These unique loans come with their own set of requirements for both borrowers and properties. Here are some key eligibility criteria:

For the borrower:

• Good credit (minimum 680 score)
• Stable income and employment
• Sufficient cash for down payment
• No recent bankruptcy or foreclosure

For the property:

• Vacant land suitable for building
• Land owned free and clear
• Qualified rural location (for USDA loans)
• Appraisal of land and construction costs

You’ll also need to work with an approved builder and have a finalized home plan and construction budget in place before closing on the loan.

Where to Get a Land Purchase and Construction Loan

You have a few options for where to get a land purchase and construction loan:

• Local banks and credit unions – Many local lending institutions offer these loans, but options can be limited.

• Online lenders – Various online lenders provide land purchase and construction loan products nationwide.

• Mortgage brokers – A broker can shop your loan to multiple wholesale lenders.

• USDA – The U.S. Department of Agriculture’s Section 502 Direct Loan Program offers these loans in eligible rural areas.

• VA – The VA construction loan program can finance land purchase and construction for eligible veterans.

Shop around and get multiple quotes to find the best loan option for your situation. USDA and VA loans are worth looking into if you qualify.

Steps to Getting a Land Purchase and Construction Loan

If this type of loan seems right for your needs, here is an overview of the process:

1. Find land to purchase – Research and select a suitable lot for building your home.

2. Get pre-approved – Apply for pre-approval from a lender to determine your loan amount.

3. Make an offer – Make an offer to purchase the land contingent on securing financing.

4. Submit plans – Provide the lender with your final home building plans and budget.

5. Secure financing – Go through the full loan application and underwriting process.

6. Close on land – Close on the land purchase portion of the loan.

7. Start construction – Begin construction once the land transaction is complete.

8. Make payments – Make interest-only payments during the building phase.

9. Complete construction – Your home must be finished by the deadline set by the lender.

10. Convert to permanent loan – The construction loan converts to a traditional mortgage once the home is done.

While it involves many steps, a land purchase and construction loan simplifies the process of buying land and building your dream home!

Alternatives to Land Purchase and Construction Loans

Land purchase and construction loans aren’t your only choice for financing land and a new home. Here are a few options to consider:

• Separate land loan + construction loan – Get two separate loans, which involves two closings but provides more flexibility.

• Home equity loan – If you have substantial home equity, you may be able to get a lump-sum home equity loan to buy land.

• Personal loan – An unsecured personal loan could be an option if you have excellent credit and meet income requirements. But interest rates are higher.

• Owner financing – The land seller finances all or part of the purchase directly instead of going through a bank.

• Cash purchase – If you can pay for the land outright in cash, you remove the land purchase component from financing.

Look at both the pros and cons when weighing a land purchase and construction loan against other ways to finance buying land and building a home.

Frequently Asked Questions

Can I get a land loan and construction loan from different lenders?

Yes, it is possible to get separate loans for the land and construction from different banks or lenders. This adds complexity but provides more financing options.

What credit score do I need for a land purchase and construction loan?

Most lenders want to see a minimum credit score of 680 to qualify, but requirements vary. Some may approve scores as low as 640. The higher your score, the better.

How much money do I need to put down?

Expect to make a down payment of 10-20% of the total costs for the land purchase and home construction. Specific down payment requirements depend on the lender.

How long does the construction phase typically last?

The construction phase can last anywhere from 6 months to 2 years, depending on the size and complexity of your new home. Your loan will specify a maximum construction timeframe.

Should I pay off the land first or get a combined loan?

There are pros and cons to both options. Paying cash for the land first removes that component from your financing needs. But a combined loan is simpler and may have lower total costs.

Can I get a land purchase and construction loan for a manufactured home?

Yes, these loans can be used to finance the purchase of land and construction of a manufactured or modular home in most cases. Double check with individual lenders.

What happens if construction is delayed beyond the loan term?

You may face late fees and penalties if construction exceeds the lender’s specified timeframe. Communicate with your lender early about any potential delays to seek an extension if needed.

The Bottom Line

While not as common as traditional mortgages, land purchase and construction loans are the simplest