5 Steps to Buying Land Chapter One – Land For Sale
Step One: Financing That Land For Sale
If you are planning on buying land for sale to build a luxury home. You might be thinking you need to find land before you worry about financing, but that’s not really true.
Without financing lined up, you might lose the land to someone else. bThis is because you can’t complete the sale before the contract deadline. By getting approved for financing first, you’re ready to buy.
Finding the right lender with the right loan is critical to getting your luxury house on your land. It’s also a somewhat intimidating process. You are going to gather all your personal financial information and hand it off to a complete stranger.
For many people, getting financing is the hardest part. Not because they don’t have the resources, but because getting any type of loan from a bank is a total pain. Because, most banks don’t really want to loan money for someone to buy raw land.
Timing to financing your luxury home
When do you actually want to build your luxury house on that land for sale? Do you want to buy the land and start building immediately, or do you want to hold the land for a while before building? The answer to this question makes a critical difference in financing and the choice of bank or mortgage company.
Let’s look at both options, as the type of loan you need for each is different. If you’re buying and holding the land, you need a land loan. Although, If you’re buying and building immediately, you need a construction loan for your luxury house.
Option 1: Buy and Hold (Land For Sale Loan)
Here’s how a land for sale loan works. First apply for the loan, like any other loan, with a bank or mortgage lender.
Lender will ask you to fill out an application and provide financial documents. Including tax returns from the past 3 years, proof of employment-income, and bank statements. Also, they may ask for financial statements from any other assets you might own.
The lender will check your credit and calculate your debt-to-income ratio. Additionally, this debt-to-income ratio (DTI) is the amount of monthly debt payments you have divided by your monthly income.
Usually, the lender wants to see this ratio below about 43%. Similiarly, the lender will use this information to determine whether they will lend you money to buy the land to build your luxury house.
Because your chosen lender will likely have a slightly different application for pre-approval you need to start early.
Legal Description Land For Sale
Once you find land you wish to buy, you will need the legal description of the land for sale. Since, this details the land location and boundaries. Of course, you won’t know this until you find the land, but it’s helpful to know what you’ll need when you get there.
Legal description will probably look complicated, but the concept is simple. Because, land that isn’t part of a neighborhood, the description is a series of directions and distances, starting from a known point, that describes the outline, or boundaries, of your land. However, a land surveyor will create the legal description for you.
This step actually happens AFTER you’ve negotiated the land contract.
The lender will hire an appraiser who will use sales data from comparable properties (“comps”) to develop an appraised value for your luxury house or land for sale. All in all this helps the lender with value of the land compares to loan amount. Since they are mainly concerned about the potential of getting their money back. They want to ensure it will sell for enough to pay off the loan.
Also, since the lender will likely not lend 100% of the cost to buy the property, they’ll use the appraised value to calculate the amount of the loan. In most cases, they’ll lend anywhere from 60 to 70% of the appraised land value, which means you’ll have to come up with the difference in cash. You will also pay the appraisal fee at closing, which is usually around $400.
The next step is for the lender to order a title commitment. Furthermore a commitment from the title company determines of the luxury house land is legally owned by the person you’re going to buy it from. Likewise this is a critical step which the bank requires.
At closing, the title company will provide title insurance, which is an actual insurance policy that will pay off the loan if a problem arises with the legal ownership of the land. Although very rare, because the attorney for the title company scours the land’s ownership history to make sure the person who owns the land actually owns it without anyone else having some kind of claim on it. You’ll pay for this title insurance at closing, just like you pay for the appraisal.
Here is some basic information that will help you start to understand the closing process.
The steps above typically take about 30 days from the time you apply for the loan. Once those steps are complete, you’ll close on the loan and on the land.
The closing is managed by the title company, who provides an agent that consolidates all the documents required by the lender and the land title documents to record the transaction with the appropriate county.
Other Key Considerations for Buy and Hold
Banks and other lenders consider lending money on raw land to be riskier than lending money on a luxury house. This is because they can’t see the land through your eyes and share your vision.
To compensate for this perceived risk, they make land loans different from house loans in two key ways:
- They require more money down (cash), which can be a big deal if you don’t have the cash available.
- They require a higher interest rate on the loan.
There is a land loan option for certain buyers in South Carolina with a lower down payment. In some cases with grants it could be as high as 100% but there is definitely 85% financing is available.
Option 2: Buy/ Build Immediately (Construction Loan)
Ready to start building as soon as you buy your land? Then you’ll want to go ahead and get your construction loan lined up. Additionally, To get the best rate and other terms with your lender, plan to buy the land with the first draw of a construction loan. Of course, a draw is the term used for a chunk of money the bank advances to you from your construction loan.
Construction Loan Financing
For a construction loan, you will need to provide details about the house you plan to build. This may include floor plans, elevations (front, side, and back views), and specifications on the materials to be used. This information will help establish cost and value of your luxury house.
It’s a good idea to get approved for the construction loan before finalizing all the details with the builder though. Because you need to know your exact budget before you start building.
The rest of the process (loan approval, title work, appraisal, and closing) works pretty much the same as the land loan process described above. However, the big difference between the land loan and construction loan is the duration (term) of the loan and how the loan gets paid off.
Differences in land and construction loans
If done through a mortgage company, the land loan will likely be a 15- or 30-year loan (like your typical mortgage), and your payments will consist of both principal and interest. As you make payments, the balance of the loan reduces until it’s paid off.
With a construction loan, the term will most likely be 12 months, and the monthly payments will be interest only. Comparitively, that means as you make the payments, you’re only paying the interest on the loan, not reducing the principal.
The payments will be less than they would be if you were making conventional house payments on the same amount. However, you still owe the total amount you borrowed.
At the end of the term for the construction loan, you’ll get a permanent mortgage, which will pay off the construction loan. Then you’ll begin making payments like you’re used to doing, the same as if you had just bought an existing house.