Buying a lot and building your own home means everything is exactly how you like it, but there are some things you need to know first.
Land and Lot Buying
Getting a loan for buying a lot or a plot of undeveloped land can be a lot harder than getting a mortgage. However, if you inherit a piece of land or can buy a lot for cash, it could be a good way to get started on your dream home. If you do finance land but don’t plan to start building immediately, expect a higher interest rate, shorter loan term, and bigger monthly payment, since land buying is considered higher risk.
Getting a Construction Loan
If you plan to build immediately, you can get what is called a construction loan, which allows you get get a lot or land rolled into your home build. There are two types of construction loans:
Short-term
A short-term construction loan is an initial loan that covers the cost of buying your land or lot and paying for your new home construction. This is typically a very high interest loan, but as soon as construction is finished you’ll need to apply for a regular mortgage in a form of refinance. The new loan should have a better rate, will pay off the construction loan balance, and let you settle into a regular mortgage payment. The challenges with a short-term construction loan are the initial high mortgage rate, the need to pay closing costs for both loans, and the fact that you have to qualify for your traditional loan when construction is complete, and if your credit or employment / income have changed, you could find yourself in trouble.
All-in-one
An all-in-one loan is also called a construction to permanent loan,a nd is designed to smooth the transition from construction phase to completed home and move-in. Instead of having to requalify for your home loan to refinance form a construction loan to a regular mortgage, you’ll simply shift to the new payment plan once the construction is complete, You’ll probably pay higher than market rates and closing costs, but you’ll only have to pay closing costs once,a nd you can always refinance down the road if needed.
Why Buy and Build?
Buying land or a lot then building your own home has several advantages. You’ll have the freedom to work with an architect and design the home of your dreams, and you’ll also have the chance to get into a new and desirable subdivision early. You can often get a lot inexpensively, reducing the total cost of homeownership, and then enjoy a rapid gain in equity as property values rise.
However, it’s important to remember the challenges of buying and building. Loans of this type are harder to get, interest rates are higher, and lower down payments through special programs probably won’t be applicable.
Plus, construction comes with its own set of stressors. You’ll need to be extremely aware of costs during building, since the cost fo lumber and other materials as well as labor can skyrocket due to external pressures. Note that if property values drop, you could end up with an underwater loan.
A real estate agent that specializes in land purchases can help you find a good deal on land or a lot, and the right mortgage company can help you get preapproved for the type of loan that’s right for you.
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