Loan for Lot and Construction: How Does it Work?
October 22, 2022
If you are frustrated by the selection of homes in your local real estate market, a more appealing option may be to purchase raw land in the Southeast Texas region and build a new home.
Paying for a piece of property and home construction involves different types of financing compared to a traditional mortgage, so it’s essential to understand those differences before you pursue lot loans and construction loans.
We want to share the basics of a loan for lot and construction, the different types of real estate loans available, and the overall lending process if you apply through Texas Gulf Bank.
Why Choose a Loan for Lot and Construction?
When you find the ideal lot for your future dream home, you need financing to make that dream become a reality. Lot and construction loans work by providing the funding needed to buy your homesite and pay for the construction phase.
Land loans allow you the freedom and time to purchase your ideal plot of land and then work on designing the home that meets your specific design and construction needs.
For example, larger luxury homes may require an extensive search for the perfect building contractor, home architect, interior designer, and landscape architect – all of which can delay the start of your home construction.
In addition, you may decide to own the property and wait on construction until personal milestones are achieved, such as paying off personal debts, retiring, or acquiring specific materials, fixtures, or furnishings to incorporate into your new home.
Delaying construction provides you with the time and energy needed to be fully involved in your lot improvement and home-building process. Projects that are a good fit for land loans include:
- Primary home
- Second home
- Beach house or lakefront property
- Investment property
When you are ready to begin the construction phase of your dream home, a lot and construction loan secures the financing needed to complete the project.
How Lot and Construction Loans Work
When lot and construction loans are combined into one loan, borrowers have the financing in place to cover both the purchase of land and construction costs while enjoying a single close process, which may save you a significant amount of time and money.
A lot loan, also known as a land loan, is a way to finance the purchase of a property that does not have a house constructed on it. This short-term loan allows you to secure your property even if you have no immediate plans to start home construction.
Loan terms for a land loan differ, depending on how long you plan to wait before you convert to a construction loan. Down payments made on the land loan may be used towards the down payment of your future construction loan.
Construction loans are also short-term financing solutions that cover all phases of construction. All funds are disbursed directly to the builder in draw payments as scheduled construction deadlines are met.
Tip: Unlike a permanent mortgage loan, construction loans allow borrowers to repay just the interest on the amount disbursed as draws. When construction is completed, home buyers have the option to either pay the remaining balance outright or convert their construction loan into a separate mini-permanent loan or traditional mortgage.
Types Of Land Loans Available
You might find the perfect location for your future home, but the condition and readiness of the land itself can impact the type of land loan you need.
There are three common types of land loans: improved land loans, unimproved land loans, and raw land loans. Let’s take a closer look at each one.
1. Improved Land Loan
Improved land is a property that is ready for immediate construction and livability, with road access, electricity, water, and other utilities already in place. Because of these property improvements, they can be the most expensive type of land to purchase.
Buyers interested in improved land will not have to spend the time and money having utility and road access built through, and may possibly have lower interest rates and smaller down payment requirements than other types of land loans.
2. Unimproved Land Loan
When a property has had some property development but is not fully ready for construction to begin, it is considered unimproved land. For example, unimproved land may have water access and road access, but not electric meters or natural gas connections on site.
Property buyers may need to pay to have any remaining utilities or road access established before construction can begin, which may increase the risk of the loan to lenders. As a result, borrowers should expect to possibly have slightly higher interest rates than for improved land loans.
3. Raw Land Loan
If your ideal property has no road access, electricity, or other utilities established, this is considered raw land, and although it is usually the least expensive property to buy, it may be more difficult to secure financing for this type of property.
Borrowers will need to have all road and utility access completed before construction begins, and this may add significant time and costs to your home development project.
Because raw land loans are the riskiest type to secure, it will be necessary to develop a detailed plan for how the land will be fully developed and used.
With a thorough plan for land development, you can demonstrate your commitment to the improvement and ownership of the property, and strengthen your chances of qualifying for a lot and construction loan.
The Lending Process for Lot and Construction Loans
Lot and construction loans may come with a higher risk for lenders since there is generally no property on site – such as a house or building – that can be used as property collateral.
As a result, the ideal applicant for a lot and construction loan with Texas Gulf Bank should have an excellent credit score (720 or higher) and provide a larger down payment to improve the chances of loan qualification.
Applicants will need to submit documentation including, but not limited to:
- Completed loan application
- Three years of historical tax returns
- Current Personal Financial Statement
- Current pay stubs
- Bank statements
- List of outstanding debts
- A detailed plan for the intended use of land
Applicants may also need to complete property evaluations for title checks, zoning ordinances, surveyed boundaries, utility access, and land-use restrictions. These all work to confirm the status and viability of the land before any financial commitments are made.
Once construction is completed, borrowers may apply with Texas Gulf Bank for a mini-permanent loan or adjustable-rate mortgage, both of which may be amortized.
Our typical loan review process from application to funding is an average of 45 days, during which you may need to provide additional financial documentation or clarify any questions that arise about the land or your intentions to use the land.
Why Texas Gulf Bank for Your Lot and Construction Loan Needs?
For those dreaming of a beautiful new home, Texas Gulf Bank can provide the financing solutions you need, whether it’s for buying a perfect plot of land, constructing a home that meets all your needs, or achieving both.
Our bank has proudly served the Texas Gulf Coast region for over 100 years, offering financial products and services with the reliability and flexibility to meet your specific banking needs.
Our team of loan officers has extensive experience in construction lending and will guide you through the entire loan application process:
- Determine if you qualify for a loan for lot and construction.
- Review your budget expectations.
- Work with you through each stage of acquiring land and constructing your custom home.
Texas Gulf Bank can help you obtain the land and home oasis you’ve always dreamed of. We invite you to visit with a lender at Texas Gulf Bank to discuss your goals and our available lending options. You can also fill out the contact form below to get started.
– If you’re not ready to apply and just want to know more about your options for residential construction financing, subscribe to our email newsletter. You’ll start to receive regular news and updates about personal lending options. Sign up today to start receiving this helpful information directly in your inbox!
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