Navigating Construction Loans and Lot Purchases
Construction loans are a specialized field of lending. The path from lot purchase to new home construction is laden with obstacles, not the least of which is the financing to get from A to B. It is really more like A to B, B to C, C to D, and so on. Because the questions regarding how to get a lot loan, how to get a new construction loan, or a one-time close permanent loan abound, let’s take a look at each type, the process, and why you would chose one over the other.
How do you get a loan just for your land? Banks provide most lot loans. There are several banks that provide lot loans when you are not yet ready to build. Depending on how much land you are purchasing, and whether it is considered rural or residential, will determine how much of a loan you can get for your property.
For example, with Security Service Federal Credit Union, if the lot is in a platted subdivision, they offer lot loans up to 90% loan to value (LTV) and do not require a survey. In addition, those loans have no acreage limit as long as the lot conforms to the other lots in the subdivision. If you are looking for a more rural property that is not in a subdivision, the maximum acreage is ten acres, a survey is required, and the maximum loan to value ratio is 80%.
However, there are several lenders with different programs to offer. Capital Farm Credit offers lot loans for residential as well as for farm and ranch properties. Typically, the residential lot loans cap out at forty acres, but they offer some great products for the rural home builder as well. They also offer construction loans with one-time or two-time closes. Other banks in the area that offer lot loans include Randolph Brooks Federal Credit Union, Frost Bank, and Great Plains National Bank. There are more that offer lot loans, most with an 80% loan to value ratio. It is always helpful to already have a relationship with the bank you are requesting a lot loan from.
Lot Loans combined with Construction Loans
Now let’s move to construction loans. Let’s say you have found the perfect lot, but would like to roll the lot and construction loan into one loan. The process can involve a one-time close or a two-time close.
If you were hoping to have both your lot and home loan rolled into one rather than having a separate transaction for your lot, you would need to be:
- Prepared to be done building within 12 to 18 months.
- Have a builder picked out with a builder contract in place.
- Final plans/specifications for the house that will be built.
- Commitment letter from a lender saying they approve your selections, have some comparables for similar homes built in that area, and it appears like you have a solid plan and timetable.
One-Time Close Construction Loans
So, you have a lot picked out, and you have all the necessary documentation and plans to proceed to purchasing and building your dream home. Do you go with a one-time close or a two-time close? The answer seems simple, but there are several factors that should be considered before choosing which way to go. In a one-time close, the lender provides permanent financing at the beginning of construction so that refinancing is not required to be done again at the end of the building process.
You would probably chose a one-time close if you were unable to provide great comparable properties for a traditional mortgage due to issues such as location, acreage, or size of the home you will be building according to Capital Farm Credit. A one-time close locks in the interest rate at the beginning of construction so that the borrower does not have to re-qualify at the completion of construction. The one-time close also saves some money by not having two sets of closings (and therefore two sets of closing costs).
However, with all those pluses, many lenders will not write a “traditional” mortgage loan before a home is constructed. Therefore, the rate most often provided for one-time close situations is often a higher rate selected by a portfolio lender.
Two-Time Close Interim Loans
That brings us to two-time closes! In this scenario, a lender writes an “interim” construction loan, usually for about twelve months, with the loan being refinanced in the traditional mortgage lender market – with a new rate, new qualifying, and a second set of closing costs. During the interim period at selected intervals according to your particular lender, “draws” are taken from the interim loan for the builder/construction crew to complete the various stages of your home. When you are done with the building process, a second loan, or a permanent loan is obtained. Depending on interest rates and whether there are good comparables for your preferred neighborhood, building size, and land amount; this loan could also be a great deal.
In either scenario, most lenders offering these types of construction loans can take an existing lot loan and roll the remaining balance of that lot plus the cost of the new home construction into the interim construction loan closing. Of course, loan to value ratios will fluctuate depending on how much you need to roll into this type of loan, but between 80-90% loan to value can be expected depending on your personal credit worthiness, along with the value of the land and the appraised value of the completed home.
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