Loans to Buy Land and Build Your Dream Home From Scratch

Buying land and building a custom home from the ground up can be an exciting and rewarding experience. You get to design every detail and truly create your perfect living space. However, it also requires significant upfront costs and financing. Securing the right loans to buy land and build a house is key to making your dream a reality.

In this comprehensive guide, I’ll walk you through the typical costs, the best loan options, and steps to qualify so you can understand how to pay for land and construct a custom home.

Typical Costs to Buy Land and Build a New House

Building a home from scratch involves several major expenses:

• Land purchase – This includes the price of the lot plus closing costs, which run 2% to 5% of the purchase price.

• Construction costs – The cost per square foot can range from $100 to $200+, depending on home style, finishes, and location A 2,500 square foot home could cost $250,000 to $500,000 to build.

• Infrastructure – If utilities, access roads, a well/septic system need to be added, this can cost tens of thousands.

• Architect and permit fees – Design plans, permits, and inspections may cost $15,000 or more.

• Loan fees – Application, origination, appraisal, and other lender fees apply. These often total $2,000 to $5,000.

• Interest payments – You’ll owe interest on construction loans during the building phase.

• Contingency fund – It’s smart to have 5% to 10% extra for unexpected overages.

All said, you could spend $350,000 to $600,000+ to buy land and build a new custom home. Having adequate financing is essential.

Loans to Buy Land

The first step is acquiring a loan to purchase the lot or land. Here are two options:

Land Loans

Also called raw land loans, these are mortgages specifically for vacant land purchases. Terms are generally 5 to 30 years. You’ll need a 20% to 25% down payment and good credit (660+ score). Interest rates start around 5% to 6%. Closing costs are high, up to 10% of the loan amount.

Personal Loans

Borrow $10,000 to $100,000 with online lenders like Rocket Loans. Rates for 5- to 7-year personal loans range from about 6% to 36% depending on your credit score. You’ll pay an origination fee of around 5%. No collateral is required.

I used a 3-year personal loan for my land down payment and recommend this option because of the fast approvals and funding. You can apply and get pre-approved completely online in minutes.

Construction Loans to Build Your House

Once you own the lot, you need a construction loan to pay for building costs. Here are two top choices:

Single-Close Construction Loans

These combine your construction loan and permanent mortgage into one loan. You only go through one application, closing, and set of fees. Payments are interest-only during the build then switch to principal plus interest.

• USDA single-close loans – Have 0% down payment but limited availability. Credit and income limits apply. Rates start around 3% to 4%.

• Conventional single-close loans – Require 10% to 20% down and 620+ credit scores. Rates start as low as 3% for excellent credit.

Two-Phase Construction Loans

With these, you get a short-term construction loan that later converts to a permanent mortgage once the home is finished. It’s a more complex process but rates can be lower.

• FHA 203(k) – Down payment is just 3.5% and credit score requirements start at 580. Rates are very low, often under 3%, making this program popular.

• VA construction loan – For veterans and service members. No down payment needed and rates start below 3%.

I chose an FHA 203(k) construction-to-permanent loan. The low down payment and rates make it feasible for most borrowers.

Tips for Qualifying for Construction Loans

While construction loans offer flexible options, you still need to meet lender requirements:

• Down payment – Have at least 10% to 20% of building costs plus land payoff saved. Some loans like VA and USDA need 0%.

• Credit scores – shoot for 660+ for best rates, or 580+ for FHA loans. Pay down debts to lower your debt-to-income ratio.

• Loan limits – Most construction loans have borrowing limits around $400,000 to $800,000. Jumbo loans over $750,000 have higher rates/fees.

• Prepared plans – Lenders need full blueprints, budget, builder bids, and construction timeline before approving loans.

I made sure to boost my credit score over 700 and save 25% for my down payment and fees to get approved. Having everything prepared and organized made my construction loan process smooth.

Steps to Obtain Financing & Build Your Custom Home

Follow this general process to buy land, secure construction financing, and build your dream house from the ground up:

1. Find land – Research locations and market values. Connect with real estate agents to identify promising lots and land for sale.

2. Get pre-approved – Talk to lenders about construction loans and personal loan options. Get pre-approved for a loan amount that covers land, build costs, and fees.

3. Make an offer – Make an offer on your chosen land or lot and negotiate price. Your lender can advise you based on appraised value.

4. Close on land purchase – Finalize loan details for your down payment amount. Close on the land and take ownership.

5. Start construction – Finalize house plans and pick a qualified builder. Get your construction loan and break ground!

6. Oversee building – Work closely with your builder and lender throughout the construction project to stay on track.

7. Construction completes – Once local building inspectors approve your finished home, start making mortgage payments on your permanent home loan.

It took me about 6 months to buy land, get approved, and break ground. But within a year I was moving into my perfect custom-built home!

Is it Worthwhile to Build a House From Scratch?

If you have the budget, building a home from the ground up can make sense. Benefits include:

• Design your ideal layout and features
• Pick premium finishes and higher-end materials
• Potentially higher home value than comparable existing homes
• Brand new systems and warranty coverage
• Energy efficiency and latest technology
• Personalized storage, aesthetic, functionality

However, risks and challenges include:

• Much higher upfront costs vs. buying an existing house
• Construction delays that increase time and budget
• Coordinating numerous complex steps and details
• Making mortgage payments during lengthy build time
• No chance to see final product before purchasing

Building a fully custom home is a major commitment and investment. Make sure to analyze the costs and benefits and have expert help to guide you through the complex process.

Partner With a Trusted Construction Loan Lender

Finding the right loans to buy land and build a house involves educating yourself on the options and costs. I recommend connecting with an experienced construction loan officer early on. They can walk you through types of loans, qualification steps, and the full process to turn your custom home dreams into reality!