Financing a land purchase or home construction project is not as straightforward as getting a mortgage for an existing property. From intense background screening to getting long-term design plans approved—the process can be a lot (pun intended).
You will find various packages for land and construction loans offered by lenders, and from an average borrower’s perspective, they can seem pretty confusing. We have put together this guide to help you evaluate available options and make the right choice. You will learn about:
- Viability of a construction and land loan
- Types of land and home construction loan packages
- Eligibility requirements
Loan for Lot and Construction—The Basics
Construction work requires preciseness and expertise. Usually, lot and construction loans are used by property developers and contractors who hold appropriate licenses to execute these projects. With the rise in demand for custom-designed homes, banks and other lending institutions have started rolling out land and construction loans directly to the consumer. As a homeowner, you can qualify for these loans only after you’ve made detailed base plans and acquired the necessary permits. To sum it up, you face increased entry barriers and red tape.
The first phase for a potential borrower is understanding what loan package they want—a standalone product for land or construction or a combined one.
Does a Construction Loan Include the Land?
Although both seem related to building a home, a land and construction loan have different underwriting criteria and are each considered unique. Land is considered a high-risk asset to lend on, especially if it’s not earmarked for residential property construction.
Construction projects are also risky because there is no tangible asset to guarantee the loan, but in this case, the risk is offset by releasing money in draws (according to the stage of execution).
As far as package is concerned, the following table addresses the land loan vs. construction loan differences in detail:
|Primary lending criteria
|• Tangible value of the asset
• Land categorization
|• Financial credibility of the borrower
• Viability of construction plans
|Up to 30 years
|Up to 3 years
|• Interest-only payments during construction
• Principal repayment at maturity
Land loans are more like home loans with larger down payments, while construction loans have shorter tenures and higher interest rates—resembling commercial real estate loans. Ideally, these loans are offered as separate products, but certain lenders may allow land purchase as an allowable expense on a construction loan. It’s mostly regional lenders that offer combo loans as they operate within a limited pool of clients and have stronger customer retention policies. Note that you likely won’t find custom-made land-to-construction loans.
Loans for Land and Construction—Types of Packages
You can get three types of packages for land acquisition and construction work:
- Standalone land loan
- Construction loan
- Construction-to-permanent loan
Standalone Land Loan
You can get a land loan for raw, unimproved, and improved land. Most lenders allow you to hold on to the land for future construction or recreational use, but you may also treat it like an investment property. Your interest rates typically depend on risk factors associated with the land, such as:
- Existing surveys and boundaries
- Available on-site utilities
- Zoning status
- Geographical location (e.g., whether it’s located beside a protected forest area)
- Relevancy of the plot in terms of city planning
It’s best to go with local lenders when acquiring land loans as they are better equipped to carry out a fair underwriting process. If you’re unable to get a land loan, you can consider alternatives like:
- Buying a dilapidated property and rehabbing it
- Taking out a home equity or cash-out refinance loan and using the proceeds to buy the land (the option works for existing homeowners only)
An exclusive construction loan can be used to cover all expenses, such as taking out permits, employing architects, and paying for materials and labor to build or renovate a property on land already owned. Many lenders also offer construction loans with land acting as a down payment, helping the borrower start the project with minimal out-of-pocket expenses.
If you want to buy land with a construction loan, talk to your lender beforehand about the suitability of the transaction. In case they don’t allow it, you have no option but to finance both products separately.
Source: Gabrielle Henderson
Construction loans have interest-only payments throughout the building phase and a balloon principal repayment at maturity. Once the property is ready, you can get it refinanced with a traditional mortgage offered by lenders like Chase Bank or Navy Federal Credit Union.
The major drawback of a construction-only loan is the burden of closing costs at multiple stages. Say, you get a land loan from Bank A, a construction loan from Bank B, and a long-term mortgage from Bank C—you’re paying closing points (total 6%–15%), processing fees, legal charges, and similar procedural costs to all three banks. The extra expenses can range anywhere between $5,000 and $20,000, which can be avoided with construction-to-permanent loans.
A construction-to-permanent—also called 1x close or single-close—construction loan allows you to finance the construction work, and once the property is ready, the loan automatically converts into a permanent mortgage. You enjoy interest-only payments during the construction period and amortized installments when you shift to permanent financing.
Construction-to-permanent loans have a single set of settlement costs, usually not more than 7%. These products typically allow the purchase of land for construction, provided you don’t exceed the borrowing limit relevant to your location. Popular one-time-close loans are available for mortgages backed by FHA, VA, and USDA, and they include land acquisition as an allowable expense.
A potential drawback of single-close construction loans is that the interest rates are higher than for other mortgage products. Since your mortgage rate is locked months in advance, you’ll also be on the losing side if the prime rates fall over time. Do a careful cost-benefit analysis before choosing the product.
How To Qualify for Lot and Construction Loans
The qualification requirements for construction loans depend on the lender you choose. If you go for traditional construction lenders like TD Bank or Regions Bank, you must have a stellar financial profile with facets like:
- Minimum credit score of 720
- Low debt-to-income (DTI) ratio, preferably 36% or less
- Adequate cash reserves in the bank
- Steady income stream
Here are the steps required to qualify for a lot and construction loan:
- Get in touch with the desired lender and discuss the pre-approval terms
- Submit the necessary documents required by the lender, such as:
- Credit report
- Past tax returns
- Income proof
- Bank statements
- Basic construction proposal
- Create a detailed construction plan once you get the pre-approval—you have to work with a licensed and insured residential builder (the lender may also ask you to hire from a pre-vetted pool of builders)
- Submit the proposed construction design, cost allocation, and draw schedule to the lender for the final appraisal
- Review the final offer prepared by the lender
- Pay the rate-lock, processing, and other administrative fees to proceed with the loan
The closing can take two to six months, depending on the complexity of your project. If you want quicker funding with lighter paperwork, you can consider private or hard money lenders.
Get Hard Money Construction Loans for Red Tape-Free Financing
A hard money loan is a real estate financing product secured by the underlying asset in the transaction. While a bank considers your financial stability and ability to repay the loan, a hard money lender sees the tangible value of the property and assets involved in the construction work. You can qualify for financing as long as the lender’s investment is guaranteed by a reliable asset.
Hard money lenders have become a popular choice for construction financing at competitive rates because they lend using private capital. They can show more leniency to borrowers with poor financial credentials or insufficient documentation.
Need a Loan To Buy a Property and Build a House? Get the Best Package With Hard Money Loan Solutions
Hard Money Loan Solutions (HMLS) is an esteemed private lending group operating from Florida. Reach out to the HMLS team for any construction financing request—the group can lend you over $50 million for all types of properties, including:
- Single-family homes
- Multi-family homes
- Commercial and mixed-use properties
- Strip malls
Source: Razvan Chisu
HMLS products are all about user convenience. You are free to use the funds to purchase land or work with a builder of your choice. You can also proceed with DIY or construction business projects.
HMLS financing is offered regardless of the borrowing intent—the finished property can be owner-occupied, used for business operations, or held as a rental or investment property. The group has no minimum requirements for credit scores, DTI ratios, or monthly income. To get a construction loan, you need to:
- Present a feasible project
- Agree to the loan-to-value (LTV) ratio offered by HMLS
The following table will give you an idea of how an HMLS construction loan is structured:
|Sample HMLS Loan
|Up to 70% of the market price or as-is value (whichever is lower)
|9.99%–12% (low LTV equals low rates)
|Only 2 points (or 2%)
|3 days to 2 weeks
|No penalty if settled after 6 months
HMLS does not charge junk fees for processing, locking a rate, disbursing money, or similar administrative work, saving you thousands in additional costs!
How To Get a Land and Construction Loan at HMLS
HMLS loans require light documentation and no intrusive background checks. The lending process is undemanding, mainly consisting of the following steps:
- Go to the HMLS loan application page
- Provide the following information:
- Your contact number
- Proposed construction
- Requested amount
- Add a custom message if required and submit
- Discuss the deal with the lender once they contact you
You can get pre-approved for an HMLS loan within a day and have the funds at your disposal in ten days (if your deal is straightforward). The team follows transparency throughout the lending cycle, offering full disclosure about pricing or any other requested info.
Source: Google Reviews
HMLS has a 5-star rating on Google and a string of reviews from satisfied users. Some of the top benefits of the group’s loans include:
- Timely and seamless release of funds
- No backbreaking paperwork
- Reliable customer support
- Flexible packages
- Loan modifications to accommodate new developments
HMLS Offers Free One-on-One Guidance to Every Applicant
If you have little to no experience with construction loans, the real estate experts at HMLS have your back. The group tends to every applicant on a case-by-case basis, providing insightful advice on:
- Finding contractors
- Preparing draw schedules
- Scheduling repayments
- Finding long-term or permanent financing
- Analyzing market shifts
- Dealing with construction setbacks
Get in touch with Hard Money Loan Solutions and let the group guide you toward a successful project. HMLS also provides tailor-made products for:
- Standalone land or property acquisition
- Bridge funding
- Refinance and cash-out refinance
- Property rehab
- Real estate-owned (REO) and foreclosure deals
- Commercial or investment property funding
- Mezzanine financing
The group can also help with resuming stalled construction projects, provided the asset value still stands.
Featured image source: Rodolfo Quirós