How to Build on land?
Buying land and building home may sound simple and straightforward, but the process is far more complex than you might think.
We’re working under the assumption that you plan on purchasing land and building a home afterwards, but you also have the option of allowing a builder to buy the land, build the home and sell it to you. Some builders own several lots and will build a new home on one of their owned lots for you. This is a sort of turn-key, "package" deal that many homeowners consider when having a new home built. In this case, a traditional mortgage is all that’s necessary to purchase the home in most cases.
Purchasing the lot first and then hiring a builder will be a more complex, but will provide you with more options. Let’s first consider the land itself. Will you be purchasing the land outright, or will you be taking out a loan?
If you have the budget to purchase the land outright, then the process becomes a little less complicated. You simply find a piece of land that you want, purchase it and start searching for a builder.
If you plan on taking out a loan to purchase the land, obtaining the financing you need will be no walk in the park. Be prepared to pay a higher down payment, higher interest rates and higher fees. These types of loans typically have much shorter term periods as well.
There are three types of loans that are generally used to purchase land and build homes: a land or lot loan, a construction loan or a construction-to-permanent loan.
Land or Lot Loan
If you have fallen in love with a piece of land but aren’t quite ready to build yet, a land loan may be a good option. This type of loan will allow you to purchase the vacant land and then search for a builder at a later date. Once you are ready to begin building, you can then consider a construction loan or paying for the construction outright.
A land or lot loan is ideal for borrowers that want to:
- • Secure a piece of property before the construction phase begins
- • Take their time planning an designing their new home
- • Take the time to settle into a new job or wait for children to finish school before building their home
Land loans can be difficult to obtain, and lenders may treat your loan differently depending on the type of lot you purchase. If your lot already has access to utilities and roads, the loan may have different terms than a lot that is undeveloped.
If you’ve found a piece of land, finished your house plans and found a builder to work with, a construction loan is your best option. These are short-term loans and the funds are dispersed periodically.
You can use a construction loan to fund the construction of a new home on a piece of land you already own, or you can use the loan to purchase the lot and have the home built.
- • If you already own the land, you may be able to use equity as collateral for the loan.
- • If you’re using the construction loan to purchase the lot and build the home, the closing of the land purchase and the construction loan will take place at the same time.
Construction loans can also be difficult to obtain and require a great deal of paperwork before being approved. Make sure that your home plans are as detailed as possible to improve your chances of being approved.
Construction-to-permanent loans, also known as "all-in-one" or "single closing" loans, are the most common type of loan that borrowers take out when purchasing land and building a home. These loans will cover the cost of building the home, and then convert over to a permanent loan once the home is built.
These loans allow you to work with one lender and have one closing. The loan becomes permanent once the final inspection has been approved and a certificate of occupancy has been issued. Single closing loans are a more cost-effective alternative to traditional construction loans and the most convenient option.
What to Look for When Purchasing Vacant Land
Now that you understand your financing options, you need to understand:
- • Where to find vacant land
- • How to know if land is buildable
In theory, finding vacant land is easy. At Land Century, we can help you find land that meets your needs and budget, or you can search for vacant land listings online.
When looking for land, you need to consider more than just the look of the property and whether or not it’s buildable. Consider the location, your neighbors and anything else you would consider if you were to purchase a pre-existing home.
What Makes a Lot Buildable?
Building on vacant land is not quite as simple as you might think. Some lots are buildable, while others are not. Subdivision regulations, zoning ordinances, building codes and permits will partly determine whether or not your lot is buildable.
State, federal and health department regulations will also need to be taken into consideration. Regulations regarding endangered species, wetlands, water quality, toxic materials and other more complex environmental issues may prevent you from being able to build on a piece of land. Before making an offer on a piece of land, you need to ensure that you do your homework to ensure that the lot is buildable from both a legal and practical perspective.