Many homeowners’ dream is to build a house on their own land. It gives you the freedom to build your home the way you want it, designed for the way you live. Of course, construction costs can be high, and the vast majority of people don’t have the savings to pay for those costs in cash. That’s where a loan to construct a house nestled on your land, which is also known as a construction loan, enters the picture.
In this guide, we will tell you how these loans function, the different types, eligibility, how to apply and how to get the best financing for your renovation.
What Is a Construction Loan?
A construction loan is a high-interest, short-term loan that is used to cover the cost of building a home. A construction loan dispenses money in stages, the way a traditional mortgage offers funds to buy an existing house. This is known as a draw schedule, which depending on the taking place of certain stages of a construction project (foundation, framing, roofing, finishing) they coincide.
Security America Morgage does not offer this type of traditional construction loan because it can be a higher cost to customers and higher risk with interest rate volatility. Below and throughout our website we discuss our one time close construction Loan products that we offer.
Building on Your Own Land: How It Works
Having the land puts you ahead. Creditworthiness: Lenders consider this a kind of equity, so it may lower your required down payment. You can either:
- Use the land as a down payment toward the construction loan.
- Combine your land and construction costs into a single loan, called a construction-to-permanent loan.
Types of Loans to Build a House on Your Land
1. Construction-Only Loan
There is only a construction period loan (6 – 12 months). As soon as construction is complete, you apply for a mortgage to pay off the construction loan. This choice provides flexibility to comparison shop for the best mortgage rates in the future, but you’ll have to go through two separate loan applications and closings.
2. Construction-to-Permanent Loan
A “one-time close” loan that converts to a traditional mortgage after your home is completed. You only have to go through the approval and closing process once, avoiding the need to spend more time and money on fees. It’s best for those who expect to be living in the house long term.
3. Owner-Builder Construction Loan
If you’re intending to work as your own general contractor (GC) on your personal residence, you’ll require a particularly special loan type. These are seen as riskier to lenders, which may ask you to demonstrate experience with construction, or to employ a licensed subcontractor.
4. VA Construction Loan (For Veterans)
If you’re a veteran or active-duty service member, the VA has a construction loan with no down payment and no private mortgage insurance (PMI). You can’t build on land purchased with the loan.
Key Benefits of Building on Your Land
- Customization: You control the design and layout.
- Equity Advantage: Land ownership improves your financial profile.
- Modern Standards: New builds meet current energy efficiency and safety codes.
- Potential Appreciation: A well-constructed home on owned land can appreciate in value quickly.
Loan Requirements
To qualify for a loan to build a house on your land, lenders typically look for:
- Good Credit Score: Most lenders require a credit score of 680 or higher.
- Stable Income: Proof of steady employment and sufficient income.
- Low Debt-to-Income Ratio (DTI): Preferably below 45%.
- Detailed Construction Plan: Blueprints, a construction timeline, and a budget.
- Licensed Builder: Most lenders require you to hire a licensed and insured contractor.
If you already own the land, be ready to provide:
- A copy of the deed
- Proof of land value (appraisal)
- Property tax records
The Loan Application Process
Here’s what the normal lending-to-build process looks like:
1. Prequalification and Preapproval
Talk to lenders about what they can offer you. Preapproval proves you’re a serious buyer and shows how much you can borrow.
2. Hire a Builder
Select a licensed builder and draw up a building contract, specifying construction dates and costs.
3. Submit Construction Plans
Lenders will scrutinize your blueprints, construction timetable and builder’s credentials.
4. Land Valuation
If you own the land, the lender will have the land appraised and consider its value in your equity.
5. Loan Approval and Closing
If everything looks good, your loan is approved. You’ll close just like a traditional mortgage.
6. Construction Draws
Payments are made at different points during construction, after inspections verify construction progress.
7. Conversion to Permanent Mortgage (if applicable)
For construction-to-permanent loans, your construction loan will turn into a mortgage automatically after the house is built.
Tips to Secure the Best Loan
- Shop Around: Compare lenders, rates, fees, and terms.
- Check Reviews: Look for lenders experienced in construction financing.
- Be Realistic: Avoid underestimating your budget; include contingency funds.
- Stay Involved: Monitor the construction process and ensure timelines are met.
- Understand the Terms: Know the interest rate, draw schedule, and repayment terms before signing.
Final Thoughts
Constructing a home on your land is a thrilling journey, but one that takes the right financing to get started. With our help you can build your dream home, from a beautiful piece of property, using a residential construction loan and still maintain financial control and peace of mind. Whether you go with a construction-only loan, a construction-to-permanent loan, or a VA construction loan, the bottom line is you need to be prepared.
Collect your documents select a trustworthy builder and select a lender who comprehends the nuances of building on unincorporated land. Design the perfect home for yourself with just the right amount of space and number of rooms.
If you don’t know where to start for the best construction loan, or you’d like to weigh the pros and cons of VA and FHA vs conventional, reach out to a local lender or mortgage broker in your area who specializes in land and new home construction financing.