Are you considering custom building a home and need land loans? We all need a home to live in, that’s a no-brainer. But what a lot of homebuyers don’t consider is that they could build their own home instead of buying one that someone else has already lived in.
This can be an excellent idea since, as a home buyer, you get to build and craft your perfect home. That is — until you take this idea and sit and consider what it might cost you to build it.
Building a home CAN be veryexpensive, but there are many ways to make your home building plans much morefeasible.
Land loans are one of those ways.There are quite a few things you need to knowabout land loans. Let’s take a deep dive so you cansee if this mortgage type is right for you.
How Do Land Loans Work?
First off, let’s discuss what land loans actually are, so you know why you might want to use it to your advantage if you’re looking to build your very first home.
Land loans are used to finance a buyer with a plot of land where they can build their dream home. If you’re looking for land loans, the type you can get depends on what land you’re buying as well as how you intend to use said land. Land loans are most often used when a buyer is not going to start their project immediately. They will hold the land for a while before it is developed.
For those intending to build a home right away, a construction loan would be more appropriate.
We’ll discuss these in a little more detail, but these types of loans are known as: improved land loans, unimproved land loans, and raw land loans. Let’s get into how land loans work in these different circ*mstances.
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Raw Land Loans
Known to be completely undeveloped land, with no electricity, sewers, or even roads insight. If you’re interested in this type of land for building purposes, you will be looking at getting raw land loans.
It’s hard to get a loan for thistype of land. You’ll need to develop a really detailed plan so the lender knowsexactly what you’re going to be doing with the land and can be confident youactually understand the task you’re taking on.
This is so you don’t pose afinancial risk since you’re going to look committed to the project when doingthis.
While it’s cheaper to get this typeof land, the large down payment and high-interest rates can make this type ofloan unobtainable for many first-timers, especially if they have a poor creditscore. These types of loans are typically used by land developers who haveintentions to construct a subdivision.
Unimproved Land Loans
Unimproved land is more developed than the last and features things like utilities and amenities. It still lacks basic necessities, like an electric meter or a natural gas meter.
While an unimproved land advance isn’t as hard to obtain as a raw land advance, it can be hard to get. So ensure you have a detailed plan ready, a large upfront down payment, and a solid FICO credit score.
Since unimproved land credits aren’t the most hazardous kind of loan a lender can offer, the upfront installments and financing costs will not be out of this world. However, it’s not going to be uncommon for them to be higher than other sorts of financing loans. That’s how land loans work when inumproved.
USDA Loans
USDA loans, or FSAloanscan be used to purchaseland, livestock, equipment, feed, seed, and supplies.USDA loanscan also be used to construct buildings or makefarmimprovements.
Improved Land Loans
Unlike the last two loans mentioned,this type of land will usually have access to electricity, water, and roads. Ofcourse, this is the most expensive land to get a hold of for someone looking tobuild their dream home because of what I have mentioned above.
The good part about looking to finance this type of land is that interest rates and down payments are a lot more manageable, as it’s less of a risk from a lender’s point of view.
With this being said, just like withany loan, it’s still going to be advantageous to have a good credit score andput down a large down payment to increase your chances of being accepted forthe loan.
How Do These Type of Loans Work?
Each land loans (the three mentioned above) has its own qualifications borrowers will need to meet if they want to successfully obtain one of these loans.
Although, there are still general guidelines you as a buyer are going to want to consider when you look to apply for either of these loans.
They are as follows:
- Have an excellent credit score
- Be able to put down a decently sized deposit
- Have a detailed plan of how you intend to use the land
- Highlight areas of the property that need to be checked: Zoning, Land-use restrictions, utility access, etc. Banks will usually want to have the land surveyed for more definitive answers.
These are all things that need to bebrought to the lender to know what you are getting into before signing off onthe requested loan.
Even after the assessment, landloans can have higher interest rates than something like a home mortgage asthey are riskier for the lender. Like other lending scenarios, if you have agood credit score and a debt-to-income ratio, you could get much lower rates.
After things have been assessed, theloan rates have been determined, and the borrower has been approved, theborrower is responsible for making the outlined down payment and paying backthe loan in full.
ThePros and Cons of Land Loans
Now that you know what a land loanis as well as the type of land loans you could qualify for as a borrower, wewant to round off this article with the pros and cons of land loans so you canget an even better idea if this type of loan is going to be a good idea for youor not.
Pros of a Loans for Land
The biggest positive from gettingone of these loans is building the home you want as long as you have thenecessary creative vision and a little bit of patience that is needed to takeon and complete a huge project like this. Some folks are using land loans tofinance more creative construction projects such as a container house.
Cons of a Loans for Land
Just like with everything, there are some drawbacks to applying for any type of loans for land.
One of those drawbacks is that it’sa riskier transaction since there is a lack of collateral with something likethis, meaning lenders are less likely to borrow.
Even if you’ve been accepted, there are still things like high down payment and interest rates, which could make life a little tricky for you, not to mention the unforeseen complications that come along with taking on a huge project like this.
The Benefits of Building a House
After you get the land, you’ll presumable want to build something on it. So is building a housethe best optionfor you? There are many reasons why it might be your best option.
First, you’ll get to pick almost everything: colors, layout, counters, flooring. You’ll have a house that’s matched exactly to your style and preferences. If you buy an existing home, it likely won’t look exactly the way you like. You might have to do some aesthetic work (painting, flooring) or renovations (knocking out a wall, replacing cabinets) before you feel like your home is just the way you want.
And, when you build a house, you’ll be able to include all the upgrades you like. Whether it’s granite countertops or radiant floor heating, you can decide what features are worth the investment. Of course, upgrades can bump up your costs considerably, so you’ll have to make sure they fit in with your budget.
But it’s not just all about expenses. New construction homes come with some savings, too, in the form of energy efficiency. When you build a house, your appliances, lighting, HVAC, plumbing, electrical, and other systems will be brand new. They’ll be more energy efficient than models that are even a few years old. This can save youhundreds of dollars per year.
And you’ll be moving into a pristine house, one that no one else has lived in.
The Drawbacks of Building a House
There are also drawbacks to building a house, even if it’s your dream house.
The biggest drawback is the expense. It’s easy to get caught up in the excitement of building a home and underestimate how much does it cost to build a house, going over budget with upgrades and additional features. And if the construction runs into any delays or issues, there could be additional costs that you have no control over.
The other big drawback to building a house is the timeline. It will take much longer for you to wait for a home to be built than to close on an existing home. If you need to be in your home by a certain date, building might not be your best choice.
How much does it cost to build a house?
So how much does it cost to build a house? According to theNational Association of Home Builders, the median price for constructing a single-family home is $289,415 or $103 per square foot. The answer to how much does it cost to build a house can vary greatly depending onwhere in the countryyour new home will be built.
- Northeast: $135.10/square foot
- Midwest: $116.37/square foot
- South: $92.56/square foot
- West: $151.88/square foot
Some of the expenses involved are optional and based on your personal choices, such as the appliances or flooring. Others, such as the foundation or plumbing, are based on local market prices.
FinalThoughts
When there is a desire to build acustom home but not immediately, a land loan is an excellent option. If you areinterested in building right away, then a construction loan would be much more appropriate.
Hopefully, you have found these tips for understanding land loans to be useful.
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Do banks give loans for land?
Yes, land purchase loans are offered by banks when you need financing tobuy a plot or a piece of land. This loan is generally provided for residential purposes and in urban areas. However, some banks do let you use the loan amount to purchase land in a rural area.
What is a loan for land called?
Mortgages secured by land are called lot loans. They work similarly to mortgages for homes, but there are important differences. This article explains how lot loans work and how to finance a land purchase. See today’s mortgage rates.
