HOW WOULD THE FINANCING BE HANDLED IF I WANT TO BUY THE LAND FIRST AND BUILD LATER?
If you want to obtain financing to buy land now but build later, you would apply for a land loan. All of the local banks, as well as some national banks and mortgage companies, offer land loans. The minimum down payment on bank land loans is generally 20% of the purchase price, with the bank financing 80% of the purchase price, and the maximum term is usually 20 years. Most buyers opt for the longest term that is available from the lender so the monthly payment is as low as possible, but pay the loan off well in advance of its due date. Land loans do not generally have a prepayment penalty, since it is expected that the buyer will at some point build and obtain a construction loan, at which time the land loan is paid off from the construction loan funds. Interest rates on land loans are generally higher than rates on conventional home mortgages, but this is alleviated somewhat by the fact that the amount borrowed is usually much less. Both fixed and variable interest rates are available on land, with fixed rates being the highest and short term variable rates being the lowest. If you expect to build soon, you may want to opt for a lower short term variable rate. If your building plans are longer term, you may want to choose a fixed rate to protect against any adverse interest rate changes.
WHAT IF I WANT TO BUY THE LAND AND BUILD RIGHT AWAY?
You can obtain a construction loan, which covers both the cost of the land and the construction of the house. Before you can apply for a construction loan a lot of preparation needs to have been done, since at the time of application you need to know the total amount of money that you are going to need to purchase the land and complete house. This means that you will need to have a piece of land under contract or already purchased so you know what the price will be. You will need to have estimates for all of the improvements that need to be made to the land order to build on it, including clearing and leveling the building site, digging the cellar hole, installing the driveway, and extending utilities such as water, sewer, electric, cable and telephone into the lot. If no municipal water and sewer are available, which is most common in this area, a well and septic system will need to be installed. If a septic system is required, test pits need to be dug and a septic system designed and approved by the state before you can obtain an estimate to install it. Finally, you will need to have settled on a plan for the house so contractors can bid on it. If you are able to obtain all of this information in a timely manner, then proceeding directly with a construction loan is an option for you. If you need time to collect this information, you should obtain a land loan first, and then a construction loan when you are ready to build. Construction loans have two phases. During the construction phase, you pay interest only on the money that has been disbursed to you. Once the house has been completed, the loan is converted to a permanent mortgage with interest and principal payments. You can opt for a one step or two step construction loan. With a one step loan, the interest rate and term of the loan are set at one closing. The advantages to this are lower closing costs and your interest rate is set for the entire term of the loan. With a two step loan, you close first on the construction phase financing, then close on the permanent mortgage once the house is completed. The advantage to this is that you will generally get a better interest rate on the permanent financing if it is not tied to the construction phase financing.
At WHITE MOUNTAIN LAND COMPANY, in some cases we offer owner financing or have special bank financing available on our land. Currently we are offering owner financing on our Hurricane Road, Belmont lot, and have special bank financing available on our Rowe Farm Road, Gilford lots.
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