If you've decided to build a home rather than buy, financing your dream may become more complicated. Rather than a mortgage, you'll start out with a construction loan for building the house; while you can use a separate loan to buy the land, you can also combine the construction and land purchase into a single deal.
With a conventional mortgage, a lender knows exactly what he's loaning money for, and how much. Construction loans are trickier: There's nothing to appraise yet, no collateral except the land, and construction can suffer delays or cost overruns. Typically, you take out a loan with a variable interest rate; the contractor submits bills on a regular basis and your lender pays the bills then charges interest on the money disbursed. You make interest-only payments during construction, then the loan comes due when you receive a certificate of occupancy.
How you handle buying the land is up to you. You can pay cash and take out a loan for construction; take out two different loans; or combine a land loan and a construction loan into a single deal. Buying the land and building the house with a single loan means you only have one set of closings costs to deal with and requires less money on hand than paying cash. If, however, you can get a better rate on a separate land-buying loan taking out two loans might be the smart move.
Because of the uncertainty, construction loans have a higher interest rate than a mortgage. For that reason, home buyers usually take out a mortgage loan after construction finishes up, then use that to pay off the construction costs over time, rather than keep paying on the construction loan. You can do this in two separate loan arrangements -- though your lender may insist you apply for the mortgage before she approves the construction loan -- or you can use a construction-to-permanent loan, which automatically converts to a mortgage when construction is done.
If you already own a home, you can use that as collateral for a home equity loan, then use the loan proceeds to buy land or help finance the construction. If you can get a better interest rate than on a construction-and-land loan, and if there's no penalty for prepaying the home equity loan early, this might work out better for you. You can repay the loan when you sell the house, provided you can make a prompt sale for a good price.
- Photo Credit Photos.com/Photos.com/Getty Images
How to Use Land As Equity for a Construction Loan
A construction loan is provided for a borrower to construct a house or building on property. Since a construction loan is a...
How to Use Land for a Home Loan Down Payment
How to Use Land As Equity for a Construction Loan. A construction loan is provided for a borrower to construct a house...
What Is the Difference Between Land Loans & Mortgage Loans?
A land loan is issued so a borrower can buy a piece of land and prepare it for development. ... The Difference...
How to Obtain a Loan for a Home Addition
If you inform the bank that you will be using the loan to finance a home addition and show a budget for...
How to Get a New Construction Loan With FHA
To qualify for a new construction FHA loan, you need a down payment ... of property you are building ... a FHA...
How to Get a Home Loan to Build a House
You can use a lot loan to finance the purchase of land on which you intend to build your home. ... Obtaining...
FHA Requirements for Mobile Homes
When buying a lot and a mobile home together, the loan period is 25 years. Loan Limits. ... Title I loans are...
How to Use Land as Collateral for a Home Loan Downpayment
Land value, or equity in land, can be used as the equivalent of cash for a down payment when building a home....