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Get a Land Loan or Construction Loan: Which Is Best?

Home Agents
By Bill Gassett
July 26, 2022
Reading Time: 3 mins read
Get a Land Loan or Construction Loan: Which Is Best?

Are you interested in building your own home? It is an exciting proposition because you get to pick and choose everything that goes into the process from the ground up.

You don’t have to worry that a builder is going to tell you that you’re not able to have something you love.

Custom building customizing things the way you want them! When you set out to purchase land for your dream home there are some essential considerations.

One of the most important will be how you should finance the purchase. We are going to look at two options. Utilizing a land loan and getting a construction loan.

If you are not going to build for a while, a land loan will be best. On the other hand, if you plan on starting construction right away, a construction loan will be the best fit.

Let’s have a look.

Getting a land loan

When you’re reading to buy a plot of land but not quite ready to build your dream home, a land loan works best. There are some vital things to know when using this type of financing.

These loans are harder to come by and not every lender does them. While lot loans are similar in some respects to home purchase loans, you can expect to need higher down payments.

You are also likely to see higher interest rates on your mortgage and more scrutiny from the underwriting process.

Lenders are going to distinguish what they are willing to do based upon how improved the land is in its current state.

For example, is it ready to build on? Can you pull a building permit and start tomorrow or are their additional improvements needed such as utilities?

With land loans, lenders will distinguish between ready-to-build lots and undeveloped vacant land. There will be far more restrictions when the land is not ready to go.

Utilizing construction loan financing

When you are ready to build your home right away a construction loan will be the perfect financing program.

The way a construction loan works is the lender will give you the financing needed to purchase the building lot and construct the home.

It will be one loan that rolls the costs of land acquisition and construction costs into one mortgage.

You will need to provide the lender with many of the same documents needed to get a traditional loan with a few additions.

The blueprints will be required, cost of construction, along with the builder’s qualifications and license information.

Lenders that provide construction loan financing will give a borrower “draws” as construction moves along. For example, when the lot is cleared, the foundation is dug and poured and the utilities have been installed, the lender will provide the first draw.

The lender will send out a representative confirming the work has been completed and then release the funds to you.

You will then be able to turn around and pay all the subcontractors. The next draw will take place when the house is completely framed.

The lender will continue to do this with multiple phases of construction until the project is completed.

With construction loans, you will typically need at least a 20% down payment. The average down payment amount is more significant with construction financing.

When looking for lenders, you will also learn that only a select few lending institutions will provide construction loan financing.

Maximum Real Estate Exposure has provided an excellent resource on everything to know about getting a home construction loan. Have a look!

Final thoughts

Whether you choose land loan financing or a construction loan will depend on your timelines for building. Researching your options in advance will make the whole process go far more smoothly.

Before making an offer on a piece of land, due diligence will be crucial.

Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell MetroWest Massachusetts real estate for the past 35 years. Bill is the owner and founder of Maximum Real Estate Exposure. For the past decade, he has been one of the top RE/MAX REALTORS® in New England.

Tags: Bill Gassettconstruction loanConsumer Real Estate TipsLand LoanNew Home Construction
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Bill Gassett

Bill Gassett is the owner and founder of Maximum Real Estate Exposure.

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