Buying the land
From vacant lot to your future home…
You have found the perfect lot to build your home, but how do you purchase it and what are your financing options? If you are not paying cash, or using owner financing, the two main options are:
LOT LOAN- Purchase a lot to build now or in the near future and get financing with no prepayment penalties.
CONSTRUCTION LOAN – Get financing that includes your construction loan and your mortgage – all in one. That’s one closing and one set of fees. Plus, only pay interest during the construction.
Search the latest lots, land, and acreage at the bottom of this article.
1) Vacant lot loan
a. 20% down payment for parcels under 5 acres with city sewer
b. 25% down payment for parcels under 5 acres without city sewer
c. 50% down payment over 5 acres
d. Loan amounts over $300k require additional down payments
e. No structures of ANY kind allowed
f. No income producing trees/fruit/nuts
g. Has to be residential in nature
h. 3 year ARM/fixed for 3 years adjustable after that
i. 30 year amortization
j. Principal and interest payments
k. 45 day close
l. Require percolation test when not city sewer… put in offer that seller to provide
m. No prepayment penalty
n. Sellers generally willing to reduce their price to get paid in full quickly
2) Home Equity Line of Credit (HELOC) on current primary home
a. No closing costs
b. 2nd mortgage
c. Up to 90% of the value of your home
d. 45 day close
e. Cannot do if currently listed for sale
f. Early closure fee (1% or $500 max) if paid off inside 3 years
3) “Ah ha” moment
a. during your Due Diligence period make sure there are no “Certificates of
Improvement” on your land. Some developers pass on the cost to develop their
lots to the unwary buyer. Make sure to ask the listing agent and title company to
prevent any additional costs to your project.
Getting from land ownership to construction loan
1) Owner Items
a. Although anything can be included in the construction loan, there are usually
$10k+ in costs that because of timing need to be paid prior to when funds are
available in the construction loan (they CAN be paid with the HELOC option
above but not the lot loan)
b. Typical examples Builder fees, architecture design, grading… some
municipalities require grading completed prior to issuing build permit.
c. These owner items will increase the total acquisition costs. A percentage of
them will contribute to your equity cushion requirement for the construction loan.
If your loan to cost is 90% then 90% of your owner items will contribute to your
equity requirement… if 80% ltc then 80% of owner items paid will count to your
equity cushion.
d. Documentation paper trail suggestion: open a checking account designated for
the home build. We will need the invoice for each owner item and proof paid.
2) Design… architect review and engineering can be pricey and time consuming
3) Cost breakdown… bid the design out to GCs and they bid it out to their sub-contractors
4) Fixed Cost contract… builder “locks in” the costs to deliver that home at that price
5) Timing… best to apply for construction loan within 120 days of wanting to break ground
6) “Ah Ha” moments
a. Pay extra attention to your grading bids … many areas have large amounts of
bedrock. This may increase the cost to grade if extra excavation and/or
explosives are required.
b. Many builders will request a deposit to marry you to them. Typical amounts are
$5k. Anything more than that is questionable. The main worry here is that the
builder will not get approved. Stipulate the bank’s builder approval as a
contingency clause to refund your deposit money.
Construction Loan
1) The construction loan pays off the lot loan. It uses much of the same documentation
from the lot loan or HELOC (more recent income and asset statements will be required).
The CRITICAL documents for the construction loan are the builder docs: design, cost
breakdown, and fixed cost contract.
2) Provides the builder a line of credit to draw from to GET REIMBURSED for work
completed. Old days the builder was given a check book. That didn’t work so well. The
new industry standard is that the builder self-funds, an inspection confirms work
completed, and then the bank releases funds. This ensures funds stay on project.
3) The equity requirement is a percentage of the acquisition costs (lot value + build
amount).
a. Up to $694k acquisition costs, $625k maximum loan amount, 90% loan to cost
i. Example… $200k lot purchase 25% down payment = $50k down at lot
closing, $494k build amount, $694k acquisition costs x 10% equity
requirement = $69,400 total equity required minus lot equity $50k =
roughly $19,400 additional down payment required at construction loan
closing
b. Up to $1.25m acquisition costs, $1m maximum loan amount, 80% loan to cost
i. Example… $300k lot purchase x 25% down payment = $75k down at lot
closing, $950k build amount, $1.25m acquisition costs x 20% equity
requirement = $250k total equity required minus lot equity $75k = roughly
$175k additional down payment required at construction loan closing
c. Up to $2m acquisition costs, $1.5m loan amount, 75% loan to cost
i. Example… $500k lot purchase x 30% down payment = $150k down at lot
closing, $1.5m build amount, $2m acquisition costs x 25% equity
requirement = $500k total equity required minus lot equity $150k =
roughly $350k additional down payment required at construction loan
closing
d. Higher loan amounts available
4) No Owner builder unless that is your trade and your primary income on your tax returns
is from a General Contractor’s licensed business… subcontractors are not eligible!
Qualifying owner builders will require a minimum 10% contingency hold back.
5) Builder approval process protects you the customer and the bank… pulls a commercial
credit bureau, verifies trade references, checks resume, and reviews bank account
financials to prove that GC has ability to complete your home build
6) Fixed Cost contract protects both as well… this is the builder’s guarantee to complete
the home at the price agreed upon by both parties.
7) Appraisal will be completed based on site inspection and review of builder docs (design,
cost breakdown, contract) to analyze the future value of the home once completed.
8) Sweat equity/skilled tradesman not given credit immediately… example: an electrician
who can do the electrical work on his house would need to have a 3rd party electrical bid.
This ensures that should anything happen to the electrician/homeowner that the project
would still have enough funding to get completed. Once the home is complete and say
the costs were $30k less because the electrician did his own work then the final end loan
would be $30k less.
9) Contingencies are not required, but that means that homeowners are responsible for
overruns and upgrades. Unless you have equity in the lot I suggest NOT having a
contingency. Here’s why: why put money into the escrow up front IN CASE you have
overruns/upgrades? Better in my opinion to keep your own funds and pay them IF you
run over and/or upgrade your home from the design plans.
10) There are interest only payments during the first 12 months based on disbursements.
After that the loan converts to the end loan that is fixed for the remaining term (9 MORE
years). Construction loans are 10 year ARMs (Adjustable Rate Mortgages). The
interest rate can adjust after that time frame. There is no prepayment penalty and so
many people opt to refinance after the build is complete.
Download the home buyer guide here:
Mortgage Loan Officer
175 SE Reed Market Rd
Bend, OR 97702-1746
office: 541.388.8721
cell: 858.649.9646
josh.alexander@usbank.com
NMLS #: 400418
* Standard maximum of ten acres; however parcels not exceeding twenty acres may be considered if typical for the area and supported by acceptable appraisal
valuation. Lot loans are not intended for investment or speculation purposes. Loan approval is subject to credit approval and program guidelines. Not all loan programs
are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice. Visit usbank.com to learn more about U.S. Bank
products and services. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National
Association. Member FDIC. ©2017 U.S. Bank.
Home Builder Guide by Josh Alexander
©2016 Josh Alexander (858)649-9646 josh.alexander@usbank.com. I created this informational narrative with the intent to
educate my customers regarding buying land and building their dream home. Not for use or distribution by other loan officers.
Information subject to change.
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