You’ve found the land for your custom home. You’ve started negotiations with the owner, confirmed access to utilities, and have solid estimates for work like site preparation. Now it’s time to buy the land.
Like any real estate transaction, buying land with the intention of building a custom home follows a well-defined process. However, it takes more time and has more hurdles to clear than most homeowners are used to. In this blog, we’ll outline the process of buying land so you’ll know what to expect.
If you plan to finance the land, your timeline plays a deciding role on your options. Do you plan to hold onto the land and build later? If so, you’ll need a land loan. Would you prefer to break ground as soon as possible? For that, you’ll need a construction loan. Here’s a look at each one.
Land loan — Land loans aren’t as common as other loans for a few reasons, starting with risk. Lenders have a harder time recovering value from raw land than a house should the loan default. Also, it really helps for lenders to know the area. That’s why community banks and local credit unions issue more land loans than national banks. Depending on your situation, you may have more flexible options, such as buying the land with a home equity loan.
Construction loan — A construction loan is really two loans, first for the building phase and then a permanent mortgage loan. You can take these out separately, or apply for a single construction-to-perm loan, which converts into your mortgage once construction finishes. Again, the best solution depends on your situation. For instance, if you already own the land outright, you might be able to use equity from it to cover the down payment.
Whichever financing option you take, you’ll need a legal description of the land, and that requires the help of a land surveyor. Like many legal documents, the land description will be loaded with formal and technical language, but it’s a straightforward concept. The surveyor starts from a known point, using it as a reference to describe the outline (that is, the boundaries) of the land with a detailed series of directions and distances.
Just like when buying a home, the appraisal comes after you’ve negotiated the purchase contract. Your lender hires an appraiser to assess the value of the land by pulling data from recent comparable sales in the area (you’ve probably heard these referred to as “comps”). The lender needs to know the value of the land so they can assess risk.
Speaking of, your lender will likely only cover the appraised value. Remember, a land loan is riskier for lenders because it’s harder to recoup their losses compared to a home loan. If you negotiated $50,000 for the land but the appraisal comes back at $30,000, you’ll have to make up the difference or renegotiate with the seller.
Also be aware that your lender will probably add terms to hedge their risk. Land loans often come with higher down payments and interest rates than home loans.
With the loan approved, your lender will order a title commitment. This step falls mostly on your lender, but you’ll likely need to help by verifying information and tracking down documents so things keep moving. Essentially, the title commitment comes from a title company who verifies the land you’re buying is legally owned by the person selling it. It’s rare for something to go wrong beyond this point, but your lender needs to know its money is protected.
That’s why at closing, the title company issues title insurance. Should something or someone contest ownership of the land — like a distant relative making a claim to it — the title insurance pays off the loan. Like the appraisal, you pay for title insurance as part of your closing costs.
The title company also manages the closing process. An agent will execute the purchase contract between you and the seller by consolidating all documents, including those required by your lender. These papers, along with all land title documents, become records of the transaction and are filed with the county.
With the land now yours, you’re even closer to building the custom home of your dreams. If you secured a construction loan, you’ll likely have 12 months of interest-only payments. That’ll give you extra flexibility so you can begin building right away.
Schumacher Homes, based in Canton, Ohio, is America’s largest custom homebuilder, with operations in 32 markets in 14 states across the country. The National Housing Quality award winning company has built over 19,000 homes, customized to fit each family’s lifestyle, since its founding by Paul Schumacher in 1992. Schumacher Homes takes each customer’s inspiration and gives it a home. Each Schumacher Homes location includes a one-stop shopping design studio and model homes displaying the latest in architectural and product trends. Stop in today, be inspired and receive your no obligation price quote.