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In very short terms-
You'd be applying for a construction loan.
You can use the land as collateral, when construction is complete, you'd be getting a conventional loan.
At time of completion, would the value of the land be used as a "down payment" for the loan? Or will I need to come up with an additional 20% of the loan value on the finished house? In this case the land value if fully paid would be slightly more than 20% of the total value of land + finished house.
If you own the land free&clear- it "should" make the "down payment".
But, every bank/ lending institution has their own rules- so check with them to be sure.
We bought land free & Clear and took out a construction loan. We also put several hundred thosand dollars of our own money into the proejct. At the end of our project, real estate values had dropped so much that we could not get a conventional morgage. We were at less than 20% equity. Now we are upside down. We are stuck in the construction loand at 9.5% interest and the bank is stuck extending the construciton loan year after year because their only option is to foreclose and lose a fortune.
Thus, while your property could conceptually serve as the down payment, if your costs overrun and/or real estate values contniue to fall, you could get into trouble. What matters when you go to get the loan is the LTV (Loan to value). You have to have at least 80% equity in the property. It does nto matter whether that equity is cash that you put in at closing, or property that you contributed to the project or whatever. When you go to get your final loan, they will appraise the preoperty and you can bowwor up to 80% of the appraise amount. There are some exceptions, but that is hte general rule.
We bought land free & Clear and took out a construction loan. We also put several hundred thosand dollars of our own money into the proejct. At the end of our project, real estate values had dropped so much that we could not get a conventional morgage. We were at less than 20% equity. Now we are upside down. We are stuck in the construction loand at 9.5% interest and the bank is stuck extending the construciton loan year after year because their only option is to foreclose and lose a fortune.
Thus, while your property could conceptually serve as the down payment, if your costs overrun and/or real estate values contniue to fall, you could get into trouble. What matters when you go to get the loan is the LTV (Loan to value). You have to have at least 80% equity in the property. It does nto matter whether that equity is cash that you put in at closing, or property that you contributed to the project or whatever. When you go to get your final loan, they will appraise the preoperty and you can bowwor up to 80% of the appraise amount. There are some exceptions, but that is hte general rule.
I think you meant you need to have 20% equity in the home, and can borrow no more than 80% of value? Is this specific to custom homes? Because with some credit scores and banks, you can put down 10%. I think what matters more is your debt to income ratio and credit history.
So would you say buying free and clear and building is less safe than buying a packaged plot/build plan from a builder?
Get a construction to permanent mortage loan with only one closing. With that one loan type you can buy the lot, build the house and when construction is done the loan automatically converts to perm mortgage. For more info just google construction to permanent mortgage financing
We got a construction loan when we built our house a couple of years ago.
The land was already paid for and was worth about $70K at that time.
The contractor needed about $155K.
Some things we chose to pay ourselves and not include in the loan, like plans, survey, excavation, permits, and appliances. That probably all came to around $10K. The bank didn't require any down payment or other money up front and the rate was 6.75%.
Every couple of months during construction the contractor would submit a bill to the bank for what was done during that period, the bank would send out an inspector, and then call us to get our approval. When the house was done, the construction mortgage became a standard one.
A couple of years later, due to changing real estate conditions, the value of our property had gone down and we didn't have much equity built up, but we were still able to refinance at 4.5% and get about $13K in cash.
We used the money to help pay for a additional room for a hot tub. It cost $21K so we had to pay the rest out of our pocket.
The bottom line was that we got a nice addition to our house, and our monthly mortgage payment is a couple hundred dollars lower that what it was.
I think you meant you need to have 20% equity in the home, and can borrow no more than 80% of value? Is this specific to custom homes? Because with some credit scores and banks, you can put down 10%. I think what matters more is your debt to income ratio and credit history.
So would you say buying free and clear and building is less safe than buying a packaged plot/build plan from a builder?
Yeah that. 20% equity. You can borrow 80% of the appraised value.
We may have been limited to 80% becuase it wsa a jumbo loan. Not sure. OUr debt to income ratio ws good. Our credit history was good. What hurt us is we have too many credit cards at 90% or more of the limit. That had a huge huge impact. WE got it cleared up but still need 20% equity which we will never have in this market. We had over 50% at the beginning, but values fell so much that we are upside down by a lot.
Well I hate builder plans so I would never do that. However buying the land and developing it and building ourselves did run into some surprise costs.
Gas company - we had to pay to extent the gas line from the nearest line to our property - surprise! $8,000.
Permits - Holy empty bank aco**** batman! You will nto beleive the permit charges. SOme of ti is just a deposit that oyu get back when you finsh the work to the government satisfaction. However they are never satisfied - that wya they do nto have to return your money ever.
Electric cable and telephone was installed free. However the electric company took so long to hook us up that we had to buy a generator for power during construciton. THe small gasoline generators just did nto produce enough power for all of the tolls that were being used by various crews and us.
Clearing and grading costs were a lot. Then we discovered that we had basically potting clay and once the top soil was removed, NOTHING would grow unless we brough in new topsoil. Several Thousand more.
I think that the CIty put int he water line at no charge. The sewer line was laready to the property. Tapping into the City sewer line is really expensive so if that is not done, expect big charges. We had to extent the sewer line from the edge of our property to the house. That was not too expensive.
You also need drainage tile around your basement and sump pump discharge lines. Then there is the driveway, (more fees to the county to connect to the road), landscaping (township requries us to plant trees), and miscellaneous.
My advice is figure out your budget for developing the land, and then triple it.
Buying pre-developed lots is safer, but then you end up on a falt predeveloped lot. Ick. I hate subdivisions. Plus you have to build what they want you to build which is usually garbage.
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