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Hi,
I have searched around and found some stuff but I am still not clear on how a mortgage works when you own your own land. I am hoping someone can clear this up for me.
Here's a scenario. Lets say I own my land outright, it's 6.3 acres and it should be valued somewhere in the $50-$80K range. I have a house plan drawn up and the builder is saying that it should cost $340k-$350k to build. He is saying that the land and house would be bundled into the mortgage which I understand cause the bank cannot take a mortgage on a house without the land.
My question is how does the land play into the value of the house? We were hoping that the cost of the land could have gone towards our down payment. Do we not get any credit for the land and if so how does it factor into the $350k cost to build?
Okay, you own the land, so when you build, you are doing a new construction refinance. Value = appraised value when home is finished. Equity (think of it as "down payment" if that helps) is the value of the land. Loan amount is cost to build + closing costs. If there isn't enough equity between the finished value and the total loan amount (costvto build + closing), you may need to put cash into the build.
Thanks for the answer. So if my house cost to build is $350k and the appraisal comes in at $400k then the $50k goes towards my down payment and I make up the difference but if it appraises for $350k then the land becomes more or less worthless in that scenario?
I think I understand. Seems like a gamble
I did this 25 years ago so the process may have changed, but here's how it worked:
I went to banks and asked about construction loans. Some banks had different products for this. The product I chose was a "construction to permanent mortgage." The bank appraised the land and new building based on the plans. I was able to get the mortgage amount approved based on the appraisal estimate, but the bank held the money until each phase of construction was complete. So when the foundation was complete, the bank came and inspected the work, then gave me the funds to pay the contractor for the foundation. Same process when the framing was complete, and so on until the house was done. I paid interest-only on the funds used during construction. Then they did another appraisal and I had a period of time (maybe 60 days?) to roll the construction mortgage into a permanent one.
I did this 25 years ago so the process may have changed, but here's how it worked:
I went to banks and asked about construction loans. Some banks had different products for this. The product I chose was a "construction to permanent mortgage." The bank appraised the land and new building based on the plans. I was able to get the mortgage amount approved based on the appraisal estimate, but the bank held the money until each phase of construction was complete. So when the foundation was complete, the bank came and inspected the work, then gave me the funds to pay the contractor for the foundation. Same process when the framing was complete, and so on until the house was done. I paid interest-only on the funds used during construction. Then they did another appraisal and I had a period of time (maybe 60 days?) to roll the construction mortgage into a permanent one.
Hope this helps!
This is pretty much what I was describing, just some of the technical aspects. Not too many lenders do the two appraisal process, any more under the one time close....but that also depends how long it takes you to build. This is not for a DIY, the contractor is vetted and a timeline is provided.
The big plus is you use the finished value. If there aren't the needed values in the area, it could be a problem and be considered an over improvement for the neighborhood.
Just a little reality check - if you don't have plans drawn, did contractors that have one or two plans on hand they can build for you. To have your dream home put into plans can cost 1000's and is usually the first cost overrun. My last C-perm paid close to 7K, just for a full set of plans for the contractor. That said, unless the neighborhood won't support it, building is a great way to get what you want and you usually make out for the effort.
I already have the plans drawn up and customized. I think i follow what you all are saying. To recap, if the building cost $350k then whatever the property appraises at above that is what the land would come up at. I have seen similar houses in the same zip selling for about $400k so I would just have to put up the difference to make up the percentage I need as a down-payment if it appraises similarly.
Thanks again
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