Understanding Funding Options for Land Purchases

by Tricia Cyr 06/14/2020

Image by Peggy und Marco Lachmann-Anke from Pixabay

You’ve decided it’s time to build the dream house you’ve always wanted. An exciting time!

Prior to hiring builders to construct your home, it’s critical to understand the financials involved before you start the planning process. Securing funding for land is different than obtaining a traditional home mortgage. For starters, there are typically fewer loan options. If you’re looking to buy land to build your new home, here is a rundown of several common funding options.

Cash

If you have the cash to cover the full purchase price of the land, this might be your best bet because you’ll be debt-free. Many mortgage lenders often waive large down payments to build houses because the borrower establishes equity in their new home by buying the land outright.

A word of warning—be careful about wiping out your savings because you’ll need money as unexpected circumstances arise during the build process—always have a financial contingency plan.

Land or Lot Loans

Land loans are available for raw, undeveloped land, and is a great alternative to avoid cleaning out your bank account. The big drawback is interest rates will be higher. Lot loans are very similar to land loans, with the primary difference being the land has building permits, surveys, and/or utilities already in place. Like a land loan, a lot loan typically comes with higher rates.

Seller Financing

Land is often difficult to sell and, to get the ball moving, some sellers are willing to lend buyers the money needed to get their build started. These loans are usually short-term and come with high-interest rates.

Construction Loans

These short-term, high-interest loans are designed to help you get your project started. To be approved, you’ll need to have a budget and construction plan in place. Once your project is completed, you can often convert a construction loan to a traditional mortgage.

Home Equity Loans

If you already own property, you can explore taking out a home equity loan to cover the cost of your new land. These loans are easier to acquire, along with longer terms, better interest rates and no down payments. The big drawback is if you default on payments, you risk losing your existing home.

Borrow from Local Financial Institutions

Local lending agencies are more likely to approve a land loan than other financial institutions that aren’t vested in the community. You might do well by identifying community banks and credit unions who are familiar with the land, along with its worth and potential.

In general, lenders command higher interest rates and bigger down payments with land-related loans because they deem land purchases to be far riskier than lending money to people to buy an existing home. The reason being they perceive owners as not yet fully invested in the property until a house is on it.

Choosing the right property and finding a way to fund the purchase is the first step. Once you’ve got these two boxes ticked off your to-do list, you’ll have taken one big step towards the day you’ll be able to move into your dream home.

About the Author
Author

Tricia Cyr

Tricia Cyr is the owner /broker of CYR Real Estate, a Connecticut real estate company that has been in business for 27 years. After working for a small real estate firm located in Branford, she decided to start her own real estate company. Not only has she been actively selling real estate on the Connecticut shoreline for over 27 years, but she is also a lifetime resident of the shoreline. "I am a full-time real estate broker who knows what it takes to get the job done, allowing you to have complete confidence that you will be well represented. I give personal attention, always keeping myself accessible. I return my phone calls promptly.” 

Tricia is energetic, efficient, honest, dependable and always working with your best interest in mind. Offering the highest quality of service and will make your real estate experience a pleasant one. Cyr Real Estate has been generating repeat clients and personal referrals for 27 years. We use all the latest technology & tools to successfully market all our properties. If you are interested in buying or selling a home, or if you need help with property management, please consider Cyr Real Estate 203-481-6638 New Haven Middlesex Association of Realtors | Connecticut Association of Realtors National Association of Realtors | Shoreline Chamber of Commerce.