Are House Building Loans Available for Buying Land?
When it comes to purchasing land for the purpose of building a home or commercial structure, many buyers look to house building loans as a means to finance their project. However, it’s important to understand that not all lenders provide financing for undeveloped land. Developed land, which has existing buildings or structures, typically has intrinsic value, making it more attractive for typical lending options.
Undeveloped Land Loans and Unique Requirements
Undeveloped land loans often come with specific requirements and conditions that differ from standard home or commercial property loans. These loans are likely to require a larger escrow deposit than conventional or FHA loans. Additionally, to secure an undeveloped land loan, the lender will need to know your intended use of the land, such as building a home or a commercial structure, and will need details about utility access, sewage facilities, and local zoning regulations.
For example, a recent client of ours purchased 34 acres for a single home site. The sale of the land and the financing were contingent upon obtaining local zoning approval for the type and size of the home they wanted to build, as well as the need to access utilities and septic approval. This process required active and involved buyer engagement, involving meetings with local officials multiple times.
The Approval and Planning Process
The approval process for building on undeveloped land can be extensive and lengthy, often taking several months. In the case of our client, this process took three months, as the purchase of the land was contingent on obtaining final approval. The sales contract included specific conditions to ensure that the client could build what they wanted and where they wanted on the property.
We also enlisted the help of a local attorney to protect our client's interests during the complex process. The cost of buying undeveloped land without proper local approval can be prohibitive. For instance, the annual taxes on the 34 acres of undeveloped land amounted to $400 per year. Once the home was completed and the certificate of occupancy was granted, the annual taxes were estimated to rise to $12,000 per year.
Planning and Costs Involved in Building on Undeveloped Land
Building on undeveloped land involves various costs but can also offer financial benefits. It's essential to consider the long-term impacts, such as increased property value and reduced maintenance costs compared to pre-built properties. However, many potential buyers are discouraged from purchasing vacant land once they understand the necessary steps and costs involved, such as obtaining local zoning approval and securing necessary utilities and permits.
Once the approval was granted, we estimated that it would take 9 to 12 months to build the home. Many people are attracted to undeveloped land due to its low cost compared to land with a house. However, the purchase of the land is often a small percentage of the total cost, highlighting the importance of thorough planning and due diligence.
Conclusion
Purchasing land for building requires careful consideration and planning, especially when it comes to financing. Not all lenders offer financing for undeveloped land, and the process involves significant upfront costs and contingencies. If you’re interested in building a home or commercial structure on undeveloped land, it’s crucial to have a detailed plan and the necessary approvals in place to make the process smoother and less stressful. Consulting with experienced professionals such as real estate agents, attorneys, and builders can provide valuable guidance throughout the process.
FAQs
Q: Can I get a loan for buying undeveloped land?
A: Many lenders do not offer loans for purchasing undeveloped land. It's important to check with multiple lenders and ensure that they have the necessary experience and requirements to finance such a project.
Q: What are the usual requirements for obtaining a loan for undeveloped land?
A: Lenders will typically require a detailed plan for development, including zoning approval, utility access, and local regulations. A larger escrow deposit and detailed financial evaluations are also common.
Q: How long does the process of obtaining zoning approval usually take?
A: The process can vary depending on the location and complexity of the project, but it often takes several months to obtain necessary approvals.
Q: What are the costs associated with building on undeveloped land?
A: Costs can include a variety of factors, such as obtaining necessary approvals, securing utilities, conducting land surveys, and completing construction. Annual property taxes may also increase significantly once the property is developed.
By understanding these factors beforehand, you can make a more informed decision and prepare accordingly.