Is Your Dream is to Buy Land and Build a Home? Here are Your Financing Options.
Buying Land to Build a Home: Important Tips from Loan Officers
So you want to buy land and build your dream home? There are a couple of different routes you can take in making this dream a reality. You can buy the land now and wait to build OR you can buy the land AND build the home at the same time. Both routes have benefits. It’s really going to come down to timing and your goals.
Wanda Harris, a land loan officer with AgSouth Farm Credit and Taylor Jones, a home loan originator of AgSouth Mortgages, share some important considerations for those who have found land or are searching for land on which to build a home. They want you to know about your options so you can make the best decision for you and your family.
One Loan or Two?
If you have a perfect piece of property and a builder who is available, it may make sense to obtain a construction to permanent home loan with AgSouth Mortgages to buy both the land and construct the home at the same time. This scenario may mean only one closing and could save you money.
If, however, you’re not ready to build, a land loan first might make sense. Wanda Harris, an AgSouth Farm Credit loan officer says that in some situations people are ready to buy the land but simply not ready to build. Maybe they don’t have the builder contract and house plans nailed down yet or maybe the market is really busy and a builder isn’t available to start construction at that time. Just because this happens doesn’t mean you should miss the opportunity to secure that perfect piece of land.
“There is great value in securing the land with a land loan so you don’t lose it,” says Wanda. “That’s huge. If you don’t want to lose the chance to buy a particular piece of land, but you’re not ready to build, it’s important to buy the land and then wait until you’re ready to build to get a construction loan. Even though it will mean more than one closing, it’s a scenario that may best fit your circumstances. Later when the customer decides they are ready to build their home, they can wrap their land loan payment in with the construction payment using our AgSouth Mortgages construction to permanent program."
Land Loan Requirements
Typically, land loans require a minimum of 15 percent down plus closing costs and fees and the property cannot be within the city limits; it must be in a rural area.
Wanda shares that it’s helpful for people to have some idea of the most they want to put toward the land and whether they have it on hand. “We can then estimate the monthly payments to make sure they can afford new debt that they are going to acquire with a new land loan.”
When a customer is prequalified, as soon as their offer is accepted on a piece of land, Wanda says she will need a copy of the signed contract by all parties to proceed with the loan request. Lot loans for construction loans have a term not to exceed 15 years. Farm loans, in which the land being purchased is currently being farmed or has some potential for farming, have a term not to exceed 20 years.
Home Construction with AgSouth Farm Credit
There are certain situations where a home construction loan might make sense to do with an AgSouth Farm Credit product instead of an AgSouth Mortgages product.
“We typically see this happen when the dollar value exceeds the construction to permanent program limits or if the home being built is to a full-time farm family or includes farm barns or ag facilities" says Wanda.
In this scenario, the land loan is paid off before setting up the construction loan. AgSouth Farm Credit can loan up to 85 percent of the home construction, depending on the appraisal. “Their down payment will be 15 percent when they are ready to do the construction loan if they do not have enough equity in the land.”, says Wanda. “We can do the one-time closing but it all hinges on the value of the appraisal and it requires a 15 percent down payment compared to a 5 percent down payment with AgSouth Mortgages. It’s just not comparable to the construction to permanent scenario with AgSouth Mortgages but sometimes it fits the client’s needs.”
Construction to Permanent with AgSouth Mortgages
One of the attractive features about obtaining a construction to permanent home loan through AgSouth Mortgages, is a one-time closing.
“If someone is buying land and building a house, they are able to do a construction home loan to purchase the land and build their house,” says Taylor. “That is all part of one loan. That one-time closing feature is going to save a good amount of money in closing costs, particularly when you compare it to someone who may be considering buying land and then waiting a year or two to build.”
With a construction to permanent loan, AgSouth Mortgages offers up to 95 percent financing, so expect to pay at least 5 percent down. “That 5 percent is based on the cost of the land and the cost to build if you are purchasing land as opposed to appraisal value when someone wants to build on land they already own,” explains Taylor.
While circumstances at times may not warrant immediate construction of a home, if you are ready to build it may be better for your wallet to wrap the land purchase and construction loan into one. In addition to one closing, Taylor explains that during the approval process, the interest rate is locked in. AgSouth Mortgages then gives customers 12 months to build their house and that rate is guaranteed from closing through the 12 months. “We can reduce that rate if rates happen to be better at the time the loan is converted from the construction phase to the permanent phase of the loan, but we will not go above the locked-in rate. That’s huge because rates can fluctuate,” says Taylor. “It’s a big selling point.”
So, too, is the modification process, when converting from the construction phase to the permanent phase of the loan.
“It’s so easy because you don’t have to go back to an attorney so it saves a lot of time and trouble,” says Taylor. “It’s straightforward. We don’t re pull credit; we don’t ask for pay stubs and information on assets again.”
Typically, home loans are 30-year fixed loans, though 15-year fixed are an option. Even though they are called 30-year fixed loans, technically they are 31-year loans because customers have a year to build before it is converted to the 30-year loan.
Contact a Loan Officer
What Do You Need to Start a Construction to Permanent Loan?
Taylor says it’s helpful to have an idea of the land cost and the cost to build. With this information he can begin the preapproval process for a loan. In order to start a formal application, we will need a signed contract with your builder, construction plans and specifications, and a copy of the deed for the land (or the contract for purchase if you’re buying land at the same time).
Taylor shares that in some instances people are not ready to build but they do want to purchase land to build a home in the future. This is when he suggests people go through loan officers like Wanda with AgSouth Farm Credit who specializes in land financing.