How to Finance a Lot or Land Loan: Part 2
Once you have found your perfect property, financing your future home site is quite different than financing an existing home. Typically, you will work with a local community bank who is knowledgeable in lot and land financing and who can serve as a trusted advisor to you during this process. It is a good idea to contact your local banker before you begin the search for your new property. Your banker can assist you with determining what price point you should be looking for to accommodate not just the land purchase, but also the longer term goal of building a new home. Keeping the big picture in mind is always important as you start the process.
Working with your community banker first will allow you the peace of mind to confidently shop for your future home site. After you have found the perfect property, you will then continue working with your banker to complete the purchase and financing of the property. Common loan terminology and loan terms you should be aware of are noted below.
- DOWN PAYMENT – MOST COMMUNITY BANKS WILL REQUIRE 20% OF THE PURCHASE PRICE AS A DOWN PAYMENT. THIS MAY BE FURTHER LIMITED BY THE APPRAISED VALUE OF THE PROPERTY AFTER THE REQUIRED APPRAISAL IS COMPLETED. TYPICALLY, THE MAXIMUM LOAN TO VALUE (LTV AS CALCULATED BY DIVIDING THE LOAN AMOUNT BY THE APPRAISED VALUE) WILL BE 80%.
- TERM – THE TERM OF YOUR LOT OR LAND LOAN WILL PARTIALLY BE DETERMINED BY YOUR FUTURE PLANS FOR THE PROPERTY AND THE TIMING OF THOSE PLANS. IF YOU INTEND TO BUILD WITHIN THE NEXT 12 MONTHS, YOUR LENDER MAY OFFER A ONE YEAR INTEREST ONLY LOAN. YOU WOULD BE REQUIRED TO PAY MONTHLY INTEREST PAYMENTS ON THE LOAN WHILE GIVING YOU TIME TO FINISH BUILDING PLANS AND SELECT A BUILDER. ONCE THAT PROCESS IS COMPLETE, YOU WOULD BEGIN PURSUING A CONSTRUCTION LOAN THAT WOULD PAY OFF THE EXISTING LAND LOAN. IF YOU INTEND TO HOLD THE PROPERTY FOR AWHILE BEFORE BUILDING, THEN YOU WILL TYPICALLY BE ABLE TO FINANCE THE PROPERTY ON AN AMORTIZED BASIS FOR A TERM OF 5 TO 20 YEARS.
- INTEREST RATES – INTEREST RATES WILL VARY WITH MARKET CONDITIONS, BUT IN MOST CASES, YOU WILL PAY A HIGHER RATE FOR RAW LAND THAN YOU WILL PAY FOR A TRADITIONAL HOME MORTGAGE LOAN.
- COLLATERAL – YOUR PURCHASED PROPERTY WILL BECOME COLLATERAL FOR YOUR LOAN. THE BANK WILL FILE A DEED OF TRUST TO PERFECT ITS SECURITY INTEREST IN THE PROPERTY. IF YOU PAY THE LOAN OFF AT ANY TIME, A RELEASE OF LIEN WILL BE PREPARED FOR YOU TO FILE ON RECORD, SHOWING THE BANK’S LIEN HAS BEEN SATISFIED AND RELEASED.
Purchasing a lot or a parcel of land can be a stressful and sometimes daunting task. It should not be. First State Bank has many experienced lenders throughout our 12 locations in North Central Texas. Our lenders can take away this stress by being a proactive and experienced partner and provide valuable insight throughout the process. Our lenders specialize in lot and land financing, construction loan financing and mortgage loan financing. Call one of our lenders today to assist you.