Land Construction Loan

Lenders that offer a land construction loan can help owner/builders realize the Great American Dream. Building and owning a home is the epitome of living life in America; and everyone wants a corner of the country they can call their own. Nothing can compare to having a hand in the design of a personal home, choosing interior and exterior finishes, and more importantly, residing in a space custom built to individual tastes never before occupied by another living soul. But once the site has been located and the ink is dry on the building plans, it is time to look for a lender willing to loan money to make a dream home a reality. Homeowner hopefuls will have to find a lender that can combine the purchase of a lot with the cost of constructing a new home. In a residential development, land/home packages are easily bank financed, since the developer has already purchased the property, secured access to city or county water, sewage, and utility systems, and adhered to all zoning ordinances. Borrowers are essentially buying the building lot and new home from the developer or real estate broker and need not worry about finding separate loans for property and construction. But potential home owners who choose to find a site and build on it themselves will have to qualify for a land construction loan.

Some lenders offer short-term financing to qualified borrowers at nearly 95% of the cost to purchase a lot and construct a new home with a small percent down. Land construction loan packages not only pay for the building lot, but also materials, subcontractor labor, fees, closing costs, and permits. The owner/builder usually acts as a project manager and manages building a new home without having to pay a general contractor. The savings realized by self-contracting keeps costs down and builds up equity in the home. Do-it-yourself homeowners have the satisfaction of constructing a lifelong dream for less than it would cost to hire a GC to oversee the process. Of course, owners who don't feel comfortable supervising could easily compute the cost of hiring professionals to see that the project proceeds according to plan, within budget, and compliant with codes. When it comes to building the souls of men, God is essentially the General Contractor who molds and shapes mankind after the image of His Son, Jesus Christ. "For we are his workmanship, created in Christ Jesus unto good works, which God hath before ordained that we should walk in them" (Ephesians 2:10).

Financing institutions which offer land construction loan packages help borrowers shop for the best repayment terms at the lowest interest rate. Once the project is completed, the home is appraised at the current market value. The amount of money spent for the purchase of the lot, plus the cost of building, including labor, is deducted from the home's value. The resulting figure is equity, which can be used as a bargaining tool for homeowner/builders to obtain mortgage financing. For instance, an owner plans to build a 2,500-sq. ft., three-bedroom, two-and-a-half bath home on a piece of property which sold for $50,000. The estimated cost to build the house, including materials and labor, is $100,000. That's a conservative estimate, but the owners plan to contribute some sweat equity, doing a lot of the work themselves. A lending institution agrees to lend the owner/builders 95% of the amount needed to complete the home, or $142,500, with the owners adding another $7,500.

Given some contingencies, the project ran slightly over budget and totaled $165,000. Upon appraisal, the 2,500-sq. ft. home is found to be worth $350,000 at the current market value. The equity comes to $185,000, less closing costs and land construction loan finance charges. The owners can now approach a bank with a home worth $350,000 with $185,000 equity and apply for a long-term mortgage, which will pay off the land construction loan and enable them to make lower monthly payments over the course of 15, 30, or 40 years. The beauty of a land/home package is that the owners don't have to spend a ton of money out of pocket to achieve a lifelong dream. And instead of waiting 5, 10, or 15 years to build up equity, the interest is already built in the moment construction is completed.

Lenders usually offer terms and interest rates for an individual land construction loan based on borrower qualifications, building plans, and sites. Online and local lenders can shop financing agencies around the country for the best terms for borrower/builders seeking to fund projects. The key for any self-contractor/owner is to, first, visit with city or county building inspectors, zoning commissions, real estate agents, and utility companies to ensure that proposed projects meet all code requirements and that access to city and county sewer, utility, and water systems is readily available. Having a soil test done before excavating will ensure that the lot is stable enough for building purposes. Owners should also check plats and drawings to locate easements, plan for proper drainage, and ensure access to connecting public roads. Local realtors and brokers can give owner/builders a good estimate of the current market value of property in surrounding areas, as well as plans for future development which may detract from or enhance future values. Calculating all these additional expenses is a necessary step before approaching lenders for a land construction loan. If owners do their homework, financing the American dream should be a relatively painless process.

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