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Financing land before planning


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By Jeff in Dickson, TN on 4/14/2007


My wife and I recently caught house fever. We've been needing more space, and we stumbled into a predesigned floor plan that captures our dream home almost perfectly. We've been looking for land ever since and we finally found what we think is the perfect spot, in an area that we have both coveted for years. I had a contractor take a look at the plans and began to look into financing.

I figured out pretty quickly that even though my household income is great and my debt ratios are low that it was going to be almost impossible to build this house on this land. We're doing better at saving, but most of our net worth is tied up in the equity of our current home. The contractor price (including land) was going to end up at $400,000 and I don't have $80,000 to put down.

Then, on the advice of a friend whose husband is a contractor, I began to look into owner-builder. I found this website and downloaded the book yesterday. I'm halfway through it and this whole thing is enthralling... but I've figured out that I need to slow down and do this right. This time yesterday, I was well on my way to calling IndyMac on Monday and trying to break ground by July 1.

Now... back to my problem... the land that I want is on the market at a good price, and it's not going to last a year while I plan my home. I want to buy it (dependent on surveys, septic perc testing, and other contingencies) but there is nobody locally who will finance 100% on raw land unless you are going to immediately (i.e. within 90 days) draw a construction loan with them and then only with a GC.

I would love to find a program that would allow me to buy the lot at 100% and then roll it into my construction loan in a year or two when I am ready to build... I don't know how these things work.

Can anybody recommend the best course of action on procuring the dream land for my dream home well before I am ready to build?


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By Jeff in Dickson, TN on 4/14/2007


Well, I guess I should've read Phil's post about lenders in better detail. I think that gives me some places to start... but anybody who could share personal experiences similar to what I am looking at would be welcome.
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By Aaron in Oakland, IA on 5/8/2007


I have done this very thing, but only slightly different. We bought 1.5 acres on a rock quarry and plan on building in one to two years. The only thing that is different is, I signed the purchase agreement with a down payment of $4,000. I then talked the owner into letting me put up a garage/outbuilding on the land before I closed. I had a lot of building materials that I could get my hands on without costing me any money. I did all of the work myself and then before I closed on the land, the appraisal came back very favorable. So the bank allowed me to do a 30-year mortgage on the land with a three-year amortization. I am going to build within that time frame, so then I can just roll the balance into my construction loan. 

I was using my hometown bank, so they knew my intentions and my credit history, so that might have helped my situation. Same thing with building on it before I closed, but hey, those were the breaks I got to allow me to do what I needed to do.  Hope this helps.


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By Michael Penn in Dripping Springs, TX on 5/14/2007


If you look at it from the lender's perspective, asking for a 100% loan to buy land is asking a lot.

While from your perspective you're looking at land that should be worth as much or more than the price, the lender is looking at land that may be somewhat overpriced at the moment, or the price may slip down some in the next year or so--there is that risk. Furthermore, the lender always looks with one eye at the possibility that you'll default, and then he'll be stuck with land that is not considered nearly as easy to move at full price as is a house on land, that somebody could buy and immediately move into.

So while it's often relatively easy to buy a house on a lot with 90% to 100% financing, it's much harder, or nearly impossible, to get similar financing on the same lot, by itself. 80% financing is more common, and even that is harder to do than financing on a house. In the worst case, a house can be rented, but not a lot, so a lot is much riskier to finance.

Another difference is that there's a huge elaborate financial infrastructure that supports home mortgage finance (Federal tax deductibility, govt. supported mortgage finance entities like Fannie Mae, jillions of different lenders and loan programs, etc.), but generally no such support for land finance.

If you're talking larger plots of land in rural areas, sometimes there's something available like Federal Land Bank, set up to support agriculture, but otherwise, you're mainly looking at a conventional bank loan. What I did was a five-year balloon note, amortized over 30 years, with my own bank. Because it was amortized over 30 years, the monthly payment was less, but on the other hand I wasn't really paying down much principal. The balloon part means that you gotta pay off the principal at the five-year point. Since I knew that we weren't going to build by five yrs, I later paid off the balloon by taking out a home equity loan on our existing residence. In retrospect, I'd probably have been better off doing the home equity loan at the outset.

That's always a possible option--rather than seeking a loan directly secured by the land, seek a loan secured by your existing home equity, or seek some other kind of unsecured loan, like from a private lender or credit card companies. Just beware high interest rates (now or later), and beware possible effects on your credit scores, which will be crucial with a mortgage application later.


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By Richard in Coventry, CT on 5/24/2007


If you have enough equity in your home, buy the land with cash from a home equity loan or a bridge loan and construction loan from a place such as IndyMac or Normandy.
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