Buying Land to Build a Home: Loan Options and Tips from AgSouth Loan Officers
So you want to buy land and build your dream home? There are a couple of different routes you can take in making this dream a reality. You can buy the land now and wait to build, or you can buy the land and build the home at the same time. Both routes have benefits. It’s really going to come down to timing and your goals.
Wanda Harris, a land loan officer with AgSouth Farm Credit, and Taylor Jones, a home loan originator with AgSouth Mortgages, share important considerations for those who have found land or are searching for land to build a home.
Knowing your options can help you make the best decision for you and your family
Should You Buy Land First or Buy Land and Build at the Same Time?
When buying land to build a home, one of the first decisions is whether to finance the land and construction together or separately.
If you have the right property and a builder ready to go, combining the land purchase and home construction into one loan may make sense. If you are not quite ready to build, purchasing the land first can help you secure the property and build later when the timing is right.
One Loan or Two: Understanding Your Financing Options
Buying Land and Building with One Construction to Permanent Loan
If you have a perfect piece of property and a builder who is available, it may make sense to obtain a construction to permanent home loan with AgSouth Mortgages to buy both the land and construct the home at the same time. This scenario may mean only one closing and could save you money.
“If someone is buying land and building a house, they are able to do a construction to permanent home loan to purchase the land and build their house,” says Taylor. “That is all part of one loan.”
Buying Land First with a Land Loan and Building Later
If you’re not ready to build, a land loan first might make sense. Wanda Harris explains that many buyers are ready to purchase land but do not yet have a builder contract or finalized house plans, or builders may not be available due to market conditions.
“There is great value in securing the land with a land loan, so you don’t lose the property to someone else,” says Wanda. “That’s huge.”
Buying the land first may require more than one closing, but it can be the right choice for buyers who want to secure a specific property and wait to build. When the customer is ready to build, the land loan payment can later be wrapped into a construction to permanent loan through AgSouth Mortgages. You can also use the equity you’ve built in the land towards your loan as well.
Land Loan Requirements When Buying Property to Build a Home
Typically, land loans require a minimum of 15 percent down, plus closing costs and fees. The property also must be located in a rural area.
Wanda shares that it’s helpful for buyers to have an idea of how much they want to spend on the land and whether they have the down payment available. This allows loan officers to estimate monthly payments and ensure the borrower can afford the new debt.
Once a customer is prequalified and their offer is accepted, a signed contract from all parties is required to proceed with the loan request.
Lot loans intended for construction have a term not to exceed 15 years, while farm loans may have terms up to 20 years if the land is currently being farmed or has agricultural potential.
When a Home Construction Loan Is Financed Through AgSouth Farm Credit
There are certain situations where a home construction loan may be done through AgSouth Farm Credit rather than AgSouth Mortgages.
“We typically see this happen when the dollar value exceeds the construction to permanent program limits or if the home being built is to a full-time farm family or includes farm barns or ag facilities,” says Wanda.
In this scenario, the land loan is paid off before the construction loan is established. AgSouth Farm Credit can loan up to 85 percent of the home construction, depending on the appraisal.
If the borrower does not have sufficient equity in the land, 15 percent down payment minimum is required. While a one-time closing may be possible, Wanda notes that this option is not comparable to the construction to permanent scenario with AgSouth Mortgages, though it may fit certain clients’ needs.
Construction to Permanent Home Loans with AgSouth Mortgages
One of the attractive features of obtaining a construction to permanent home loan through AgSouth Mortgages is the one-time closing.
“That one-time closing feature is going to save a good amount of money in closing costs, particularly when you compare it to someone who may be considering buying land and then waiting a year or two to build,” says Taylor.
With a construction to permanent loan, AgSouth Mortgages offers up to 95 percent financing, meaning buyers can expect to pay at least 5 percent down. This down payment is based on the cost of the land and the cost to build when purchasing land, rather than appraisal value alone.
Interest Rate Lock and Conversion from Construction to Permanent
In addition to one closing, Taylor explains that during the approval process, the interest rate is locked in. AgSouth Mortgages then gives customers 12 months to build, with that rate guaranteed through the construction period.
“We can reduce that rate if rates happen to be better at the time the loan is converted from the construction phase to the permanent phase,” says Taylor, “but we will not go above the locked-in rate.”
The conversion process is also straightforward. Borrowers do not need to return to an attorney, re-pull credit, or resubmit income and asset documentation.
Typically, home loans convert to 30-year fixed-rate loans, though 15-year options are available.
What You Need to Start a Construction to Permanent Loan
Taylor says it’s helpful to have an idea of both the land cost and the cost to build to begin the preapproval process. But to start a formal application, borrowers will need:
- A signed contract with the builder
- Construction plans and specifications
- A copy of the deed for the land, or a purchase contract if buying land at the same time
If you are not ready to build but want to purchase land for the future, Taylor suggests working with a land loan officer like Wanda who specializes in land financing.
Frequently Asked Questions About Buying Land and Building a Home
Should I buy land before building a house?
It depends on your timing and readiness to build. If you are not ready to start construction or do not yet have a builder or house plans, purchasing the land first with a land loan may allow you to secure the property and build later.
What is a construction to permanent loan?
A construction to permanent loan allows buyers to purchase land and build a home using one loan and one closing. The loan starts as a construction loan and later converts to a permanent home loan.
How much do I need for a down payment when buying land?
Land loans typically require a minimum of 15 percent down, plus closing costs and fees.
How much do I need for a down payment on a construction to permanent loan?
Construction to permanent loans through AgSouth Mortgages offer up to 95 percent financing, so buyers can expect to pay at least 5 percent down.
What do I need to apply for a construction to permanent loan?
To apply, you will need a signed builder contract, construction plans and specifications, and documentation for the land, either a deed or a purchase contract.