Building a new home on empty lot

[Anonymous]

I would like to buy a house on a large plot such as 1 acre.  The problem is that in my area there are not many houses offered on those lot sizes.  There's only 5 or 6 in the area and I don't like any of them.  There's tons of empty land though just waiting to get grabbed up at bargain prices.  I've seen steals out there such as 1 acre for only 20k.

So I am considering buying the land and building my own house there so I can get what I want.

What's the general outline on how to accomplish this?  Do I have to get 3 separate loans?  (land loan, construction loan, mortgage loan) or is there some way to consolidate this into 1 giant loan instead?  

[Imperfectfuture]

It's a construction loan. Need a realtor for the land, and contractor to build. New construction is covered by USDA, FHA, they may have a preferred lender. Do not know about conventional.

[iv]

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@Anonymous wrote:

What's the general outline on how to accomplish this?  Do I have to get 3 separate loans?  (land loan, construction loan, mortgage loan) or is there some way to consolidate this into 1 giant loan instead?  

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You're looking for a "Construction to Permanent"/"Single Closing" loan.

[BrianB_The_Loan_Professor]

There are only a few banks offering construction loans - they disappeared for about 5 -6 years after the melt down - they were found to be a huge risk - too may uncompleted jobs or abuse of the funds paid out for the work etc - if you look around you should be able to find financing - 

Most require that a contractor do the work - it isnt clear if you planned on doing the work yourself or not - 

I would start by finding contractor and seeing if they have any recomendations or strategies

Over the time when the banks were not offering loans many smaller contractors/builders survived by using a line of credit and covering much of the cost until competion

Upon completion the buyer gets a loan and they get paid  

Good Luck

B

[Anonymous]

Do you have to buy the land way in advance of the construction or can you acquire the loan to buy the land and start building on the house at approx the same time?

Has anybody on this forum actually gone thru this?

I've heard that downpayment requirements for construction loans are extremely high, something like 40%, plus the interest rate is at least 2 points higher than the standard market rate.

[Imperfectfuture]

I am going through it. No different than any other loan. New construction generally works that way, land is part of the package.

[Anonymous]

Do you have any updates regarding this process or advice. We are preparing to build our first home on land we have recently inheirted. Any advice you can offer would be greatly appreciated as there isn't much info regarding this process. 

[ShanetheMortgageMan]

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@Anonymous wrote:

Do you have any updates regarding this process or advice. We are preparing to build our first home on land we have recently inheirted. Any advice you can offer would be greatly appreciated as there isn't much info regarding this process. 

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There are generally 3 parts to the construction-to-perm (1x Close) loan approval:

• Credit approval (your income, debts, credit, funds, etc.)
• Builder approval (the builder will need to complete a contractor profile, provide references, licensing, insurance and sometimes even tax returns)
• Project approval (architectural plans, survey, plot map, description of materials, appraisal, etc.)

The credit approval part is straightforward, as it’s just like getting approved for a regular (non-construction) loan.  The builder approval can run concurrently with the credit approval, to make sure the builder you plan on using will meet all of the lender's criteria.  The project approval comes last, as it relies on the other two parts. 

The documents for the project are needed when it comes time to order the appraisal, since the appraiser will require a full understanding of what is being built.  The appraisal is often one of the last steps. 

There are two figures to be concerned with, the total project cost & the as completed appraised value.  The down payment % is based on the lower of the two.  I've primarily done FHA construction-to-perm mortgages, so in that situation the down payment can be as low as 3.5% as long as the as completed appraised value is equal or greater than the total project cost.

The total project cost will consist of the land cost + the cost of construction.  Optionally an interest reserve (to make payments during the course of construction), construction contingency set aside (in case the actual construction costs exceed the builder's bid), standard closing costs (just like on a regular mortgage), and construction fees (additional fees the lender charges for managing/adminstering the construction loan). 

When factoring in those optional items, usually the total project cost calculation is roughly 110% of the land cost & the cost of construction.  So if the land costs $50k and the cost of construction is $200k = $250 x 110% = $275k total project cost.

Let's say that was the situation, then as long as the as completed appraised value is also $275k, then with an FHA construction-to-perm loan the down payment would be 3.5% of that, or $9,625.

If you didn't include those optional items in the total project cost, then the project cost would be $250k ($50k land + $200k constructoin) and the 3.5% down payment would be $8,750... but then you also have to pay all of those other items out of pocket at closing (roughly $25k), for a total of $33,750.

Keep in mind these are just rough numbers.

Unless you have money to spare, it's to your advantage to include all of those optional items in the project cost in order to come in at closing with less money.

There are also VA construction-to-perm loans too, which work in a similar manner (except for with the potential of 0% down), and conventional construction loans are also out there, which I've seen with anywhere from 10-30% down payment requirements.