Land Loan to Construction Loan to Mortgage (finance, banks, equity)

[markintosh]

Hi guys:

My parents and my wife and I want to build a house together. We've found a lot we like, so I'm wondering... Would the typical process be to buy the land with a loan, then do the construction/mortgage loan separately? Have you ever heard of doing them all as part of one big package?

The lot will probably cost $100K. We have 20% to put down to purchase. When we sell our home this summer, we are hoping to make $100K, so we'll pay off the lot and keep the remaining cash to put towards the construction/mortgage along with the value of the lot so that there is at least 20% equity.

Any suggestions or advice with this scenario? Thanks!

[joe moving]

I dont think banks finance land. This could be off, but this is my best understanding so far:

My understanding is you have to pay off the land
Then get a construction loan with 20% of the estimated construction cost. (???)
At the end of the construction loan you would get a mortgage on the land and building, of course you should way more than 20% equity on the home at that point.

so on a 100k house with 100k land, you end up putting 120k down. 80k mortgage.

[chet everett]

It is mostly correct that lenders will not normally finance the purchase of undeveloped land. There are ways to use a mortgage to acquire vacant land, including for agricultural purposes, business development ventures (at substantially higher rates / down-payment levels than traditional residential loans) and for folks that have substantial assets to use them as collateral for the land purchase but if you can wedge yourself into one of those categories you need to fill-in some details --

You mention that you've "found a lot we like" so maybe this is not raw land but a developer is offering this sites for building. Typically developers have financing lined up. You put down a deposit, they start construction and you don't start making payments until the place is finished and close on the new construction financing...

You also state this would be and undertaking you, your wife and your parents want to pursue together. Is mom and dad's home owned free and clear? If there is enough equity to tap it may be possible get things rolling with a reverse mortgage. Worth investigating if parents are old enough...

Finally you seem to be living in home that you believe you'll be able to sell with a profit approximately equal to the land acquisition cost. Things would be a lot less risky to any lender and ultimately to you FIRST get solid estimates on what it will cost to build the kind of home that would suit you and your parents, then sell the current house ASAP, stuff all that cash in the bank, get all the details of land purchase and construction-to-permanent mortgage worked out while renting and then moving forward with the whole scheme.

Frankly in pretty nearly every part of the country there are substantial discounts on existing homes, some of which have never been lived in so it would be a surprise if the path you are planning on embarking (buying a piece of land with a six figure price tag, selling your current home for a six figure gain, doing a joint project with parents and then financing the thing...) will get a green light from any lender UNLESS you have substantially minimized the risk that things will go awry...