Amid the coronavirus pandemic, more and more Americans are choosing to move away from big cities and towards suburban or rural areas. In a survey conducted by the Harris Poll, nearly 40% of U.S. adults living in urban locations considered moving away from densely populated areas. Among the real estate options that some have considered were buying land and building a house.
Before you start searching for plots of land to build your dream home, there are several considerations that you should be thinking of in terms of land use, zoning and financing.
Have a quick question about home financing? Visit Credible to get in touch with experienced loan officers and have your mortgage questions answered.
Factors to consider when buying land
Whether it’s raw land, unimproved or improved, buying land without an existing house means you need a land loan.
Land financing is different from a typical home mortgage as there is no home to act as collateral for the loan. Due to the lender’s risk exposure from the lack of collateral that an existing house would give, getting a land loan is always more complicated.
Land loans are also likely to have less favorable terms than a mortgage loan. Depending on the lender, there may be a substantial down payment and higher interest rates. Additionally, some land loans have shorter repayment terms than a 15-year mortgage or 30-year mortgage.
Before purchasing land, consider these three things:
- Land use
1. Land use
The terms of the land loan — for example, the down payment and interest rate — generally rely on the intended use of the land.
For build-ready lots, although there are things that could go wrong, cause delays or increase costs, banks generally favor these over raw land. For build-ready lots, the typical down payment is between 15% and 25%, while raw land can be as high as 50%.
It’s essential to have the land surveyed and check zoning and land restrictions before presenting paperwork to a lender. For example, if the property is located on wetlands, you will need special permission to build. This process depends on state rules and regulations and whether or not the federal government has jurisdiction.
You also need to consider access to utilities. Having water, sewer, electricity and cable hook-ups ready saves you a lot of time and money. Road access is another problem to think about. You’ll need a permanent easement to access a public road if one isn’t already present.
And lastly, you’ll need to search for and secure financing with acceptable terms that fit your budget. There are several sources such as:
- Local banks and credit unions
- A home equity loan
- A USDA loan
- Seller financing
You need to figure out if your budget allows for financing the land purchase, as well as building a home. Aside from the cost of construction, there are land adjustments, utilities, fees and permits. Most experts advise buying land with cash, but of course, this isn’t always possible.
For more information on home financing, visit Credible to compare mortgage rates and lenders.
Alternative to buying land
If the process of buying land isn’t feasible, you can always purchase a home or seek to refinance your current home.
Purchase an existing home
There is a range of options available for a home mortgage to suit your needs and budget. Once you are pre-approved for a home loan from your lender, you can look for a home and make an offer. A qualified real estate agent can help you during your search, along with assisting you through negotiations and paperwork. Although there are several steps to buying a house — financing, searching for homes, making offers, inspections, property valuation and closing — buying an existing home can be more convenient than buying land.
Credible can introduce you to multiple mortgage lenders and provide you with personalized mortgage rates within just a few minutes, all without impacting your credit score. And to help gauge the costs of your mortgage, use an online mortgage calculator to determine potential monthly payments.
Refinance your current home
Another option is to replace your existing home loan with a new one under different terms. Refinancing your current home might be a better choice for these reasons:
- Lower interest rates
- Replacing an adjustable-rate mortgage (ARM)
- Your credit score has improved
- You want to lengthen the loan term
- Cash-out refinance
There are plenty of refinancing options out there. Visit Credible to view loan refinance options across multiple mortgage lenders with fewer forms to fill out.
If you want to buy land, weigh your options
Land loans are structured differently than traditional home mortgage loans and have varying requirements. Land use, zoning and financing all play big parts in what you’ll end up paying for a plot of land. Alternatively, there’s always the option to purchase an existing home or to refinance your current home.
Visit Credible to learn more about financing a home purchase. And as you’re considering your budget, you should use an online mortgage calculator to determine potential monthly payments.