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Not a buyer's market!! Separate loans??

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Jerroldtrice
Established Member

Not a buyer's market!! Separate loans??

Hi All!

 

I live in a place where it is not a buyer's market AT ALL! Options are limited to say the least and prices are soaring. Anyway, we have been looking into just building a house because everything else is slim pickins. The price of land here is outrageous. The cheapest we have found in a decent neighborhood is $40,000, but when we look at the MLS listing it says it's a cash sale. Is there a way to get a loan for the land so we can buy it and a separate loan finance the house? I've heard of it vaguely but don't know how difficult or likely it is to work.

 

Any advice is appreciated!!

 

 

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6 REPLIES 6
StartingOver10
Moderator Emerita

Re: Not a buyer's market!! Separate loans??

You can get a loan to purchase the land. Just check with area lenders. Usually the LTV on that type of purchase is low, less than 75% is common.

 

However, if you are going to get a construction loan to build your new place, then the lender will want to pay off your land loan with some of the proceeds of the construction loan so they have collateral while you are building. Are you planning to start building right away or just purchase the land first and start construction at a future date?

Message 2 of 7
Elcid89
Contributor

Re: Not a buyer's market!! Separate loans??

I'd just pursue a construction loan for the entire package. You can buy the land and finance the construction with a single line of credit that will convert to a (usually) conventional mortgage once the house is completed.

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Jerroldtrice
Established Member

Re: Not a buyer's market!! Separate loans??

Thank you for your responses!

 

We are wanting to do it all at the same time. We have a builder ready to go as soon as we can find somewhere to put it!

 

I'm not familiar with what this kind of loan would entail so I was hoping we could roll it all into one loan so thank you Elcid89. So it should be okay if we are buying the land from one place and having a whole other company build the home?  It seems self-explanatory, but you never know with these loan situations! I have an email out to our lender but she's a busy lady and haven't heard back yet.

 

Have a great day!!

 

 

Message 4 of 7
jnkp2001
Regular Contributor

Re: Not a buyer's market!! Separate loans??

"I was hoping we could roll it all into one loan"

 

 

I believe that's the way the banks prefer it.  I always found it a lot harder to just get the land.  That's why you see a lot of owner financing on lots or land.

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Elcid89
Contributor

Re: Not a buyer's market!! Separate loans??


@jnkp2001 wrote:

"I was hoping we could roll it all into one loan"

 

 

I believe that's the way the banks prefer it.  I always found it a lot harder to just get the land.  That's why you see a lot of owner financing on lots or land.


+1

 

Banks tend to be very resistant to land only loans, with LTV hovering somewhere between 50% and 75%, so on a land only loan you are looking at footing between 25% and 50% of the purchase out of pocket unless the owner is willing to carry the paper for the difference. Bad mojo.

 

Banks much prefer that you present them with a consolidated package - land purchase and home proposal. That said, many banks are leery because you are essentially asking them to loan money secured by something that doesn't exist yet, and as a result the due diligence can be daunting.

 

You can expect that the bank will want:

 

1) A qualified builder - in other words a licensed general contractor who has an established reputation. Hiring a buddy or engaging in owner/builder is a long shot.

 

2) DETAILED specifications - in other words, detailed drawings, floor plans, proposed materials lists, everything. Your builder should be able to prepare a blue book which will satisfy this, but don't be surprised if the lender wants more. They get very picky about this.

 

3) Evaluation of the submitted plans and information by a qualified appraiser - as with any home purchase, these have to appraise out at requested value, or the difference comes from you.

 

4) A hefty downpayment - unlike a conventional property purchase, due to the heightened risk involved in a construction loan the bank is typically going to want a much larger downpayment for a construction loan to show them that you are committed and have some skin in the game. 20% is usually the typical minimum, but I have seen this go as high as 25%. Be prepared.

 

5) Excellent credit - this goes without saying. Don't go in there with a 650 expecting to get a con loan.

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Elcid89
Contributor

Re: Not a buyer's market!! Separate loans??

Things to consider:

 

If approved, the bank will negotiate a schedule of draws with you and the builder. In other words, the bank will release a pre-detemined amount of money to the builder at delineated stages of construction - at loan closing, lot clearing & foundation completed, framing completed, etc. You can be sure that the bank will want an inspection at the completion of each phase of the schedule, performed by their inspector. if he doesnt' sign off, no payment to the builder until rectified and things can get ugly. The first draw is almost always taken from your down payment.

 

Loan rate - con loans are typically variable rate. Some lenders will structure them as interest only loans. Others won't.

 

Risks:

 

Home isn't completed on schedule or on budget - you can be looking at footing the bill for extension fees or even footing the overage out of pocket if the appraisal doesn't support the inflated price.

 

Valuation at completion - the house will have to be appraised AGAIN at completion. If the market has dropped in the interim, you can be left holding the bag for the difference out of pocket.

 

Your financial situation changes prior to completion - you may be unable to qualify for the mortgage loan at completion, and this creates problems. Construction loans are short-term - typically no longer than 1 year, and it's a balloon payment - so if you can't roll the con loan into a mortgage and you can't pay off the con loan in a lump sum, bingo - you're in foreclosure.

 

It can be rewarding, but know exactly what you are getting yourself into, and what you are obligating yourself to do, before you do it.

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