Funding Options for Home Building Lots

by Barbara Rybicki 04/12/2021

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

Barbara Rybicki

I am originally from Poland but have been a Grafton resident for almost thirty years.

I come from the Hospitality Business. I used to work in 5 Star Marriott Hotel Management. That experience taught me how to provide excellent customer service. That "Marriott" way of doing business instilled in me over the years helps me tremendously to succeed as a local real estate broker.

Nothing is more exciting to me than gratifying feeling I get from helping people reach their real estate needs and dreams. You can count on me to always do what is in your best interest. I will be there for you throughout the entire transaction making sure you understand each step of the buying or selling process. I will guide you with great communication skills  and hard work ethic. 

I have not only passion for my job but also extensive real estate expertise. Whether it is preparing and staging your home to sell for top dollar or helping you purchase a perfect home, feel free to reach out to me so we can start this process together.

I specialize in marketing and selling residential real estate in Grafton, Upton, Northborough, Westborough, Southborough, Shrewsbury, Milford, Hopkinton and Metro West area.

I can not wait to meet you!

Awards and Designations:

Realtor Designation since 2005

Licensed MA Broker since 2009

Accredited Buyer Representative (ABR)

Accredited Staging Professional (ASP)

Worcester Regional Association of REALTORS® since 2005

National Association of Realtors (NAR) since 2005

Multi-Million Dollar Producer

Remax Executive 100% Club 2013, 2014, 2016, 2017, 2018

Remax Platinum Club 2015

Remax Hall of Fame Club 2017