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Advice for House Building Prep - Loan question
Posted on 8/13/24 at 3:44 pm
Posted on 8/13/24 at 3:44 pm
Wife and I are targeting to start building our forever home end of 2025, beginning of 2026.
We already have the lot. We currently owe $46,154 on the lot loan. It was purchased 5 years ago on a 20 year variable rate loan with 4 year refinance terms. Currently the rate is 7.5%.
We have aggressive savings targets for our downpayment to be coupled with equity from our current house.
Should we pay the lot off completely today? Or save that 46K to put down on the home loan? What's the best play here?
I appreciate any insight.
We already have the lot. We currently owe $46,154 on the lot loan. It was purchased 5 years ago on a 20 year variable rate loan with 4 year refinance terms. Currently the rate is 7.5%.
We have aggressive savings targets for our downpayment to be coupled with equity from our current house.
Should we pay the lot off completely today? Or save that 46K to put down on the home loan? What's the best play here?
I appreciate any insight.
5
Posted on 8/13/24 at 4:08 pm to Brobocop
I’m an idiot but I say pay off the lot unless your money is in something making more than 7.5%. Best savings I’ve seen is 4.2% to 5.5%.
You can use your paid off land to help with the down payment of the entire project.
You can use your paid off land to help with the down payment of the entire project.
Posted on 8/13/24 at 5:09 pm to Rize
quote:
You can use your paid off land to help with the down payment of the entire project.
I've heard you can do this. Is it the down payment on the construction loan only? Or you would factor in the cost of the lot when you refinance house+lot after completion of the build?
Let's assume the lot is worth $80K.
Posted on 8/13/24 at 5:35 pm to Brobocop
quote:
I've heard you can do this. Is it the down payment on the construction loan only? Or you would factor in the cost of the lot when you refinance house+lot after completion of the build? Let's assume the lot is worth $80K.
It can be used for a down payment towards the home. It may vary from bank to bank on the percentage used which I think is typically 80-100%.
Also may be able to use purchase price of land or may have to have it appraised. I’m not an expert so maybe someone who does this will chime in.
Posted on 8/13/24 at 5:47 pm to Brobocop
So this might be the “wrong” answer but when I started my construction loan I rolled my land loan in with it. Mainly because the money I would have used to pay the land off would be going towards my home anyways. I just chose to keep it liquid for the build instead of using it as equity for the down payment. It was a lower rate than my land loan too. So I basically refinanced my land loan down to a lower rate and longer term.
One thought, make sure you have enough equity in your land if don’t pay it off to still use as your down payment.
If you’ve owned less than a year you can use purchase price. Longer than a year then appraisal value (if appraisal value is higher than purchase price might consider having it appraised if it’s significant).
Bank will typically loan 80% of loan value. The land loan isn't a down payment as it doesn't decrease the amount you owe. It just adds value to get that 20%, cash or equity, you're required to have lower. If you're building a 500k house the bank will only loan you 400k (80%). So you have to come up with 100k for the down payment (20%). If your land loan is 46k but valued at 80k you have 34k towards your down payment/your required equity.
One thought, make sure you have enough equity in your land if don’t pay it off to still use as your down payment.
If you’ve owned less than a year you can use purchase price. Longer than a year then appraisal value (if appraisal value is higher than purchase price might consider having it appraised if it’s significant).
Bank will typically loan 80% of loan value. The land loan isn't a down payment as it doesn't decrease the amount you owe. It just adds value to get that 20%, cash or equity, you're required to have lower. If you're building a 500k house the bank will only loan you 400k (80%). So you have to come up with 100k for the down payment (20%). If your land loan is 46k but valued at 80k you have 34k towards your down payment/your required equity.
This post was edited on 8/13/24 at 7:33 pm
Posted on 8/13/24 at 8:38 pm to Brobocop
As others have said the equity in your lot would apply as the down payment to the construction loan. Most banks will honor the cost of the lot for less than one year and the appraised value after a year of ownership. Depending on bank you should be able to finance anywhere from 80-90% of construction + lot. Paying off the lot is always a good option as it reduces any potential lot balance being rolled into the mortgage and interest cost. One thing to consider is to ensure you intend to build before paying off. The only way to get those funds back if you decide not to build is to sell or refi the lot.
Posted on 8/13/24 at 9:22 pm to Brobocop
Have y’all met with builders yet? Some builders will purchase your property from you then sell it back to you as a package when the house is complete. You won’t be paying 7.5% interest and you’ll get the equity from the land for the down payment once complete.
Not sure they will do it that far out (2026) but wouldn’t hurt to ask. The very least you would save 7.5% while the house is being built.
Not sure they will do it that far out (2026) but wouldn’t hurt to ask. The very least you would save 7.5% while the house is being built.
This post was edited on 8/13/24 at 9:27 pm
Posted on 8/13/24 at 10:12 pm to dlambe5
quote:
Have y’all met with builders yet? Some builders will purchase your property from you then sell it back to you as a package when the house is complete. You won’t be paying 7.5% interest and you’ll get the equity from the land for the down payment once complete. Not sure they will do it that far out (2026) but wouldn’t hurt to ask. The very least you would save 7.5% while the house is being built.
I did something similar with my last house Baton Rouge in 2019 and had my built in 2020.
Posted on 8/14/24 at 4:04 am to Brobocop
I’ve built a few homes, 1st thing to remember is that a forever home probably won’t be. All mine were intended as forever homes and ended up not being due to kids/grandchildren moves.
I wouldn’t pay off the lot, since you’re just shuffling cash around basically to get to at least 20% equity in the loan minimum.
Things to make sure you do though in the build.
Big enough garage (assuming you have one), floor out for storage over it. One thing I’ve seen over and over as a realtor are garages too narrow or too short to put 2 full size vehicles in comfortably. You don’t have to heat and cool the storage space but having a good space for Christmas tree storage, etc you’ll thank me for if you haven’t thought of it.
If it’s a 2-story, door to access that space (usually in a closet), if it’s a 1-story, get an attic lift, bought mine from Versa-lift. You only have to fall off a drop stair with a Christmas tree once to know how handy that will be. Best 2 grand I ever spent.
Those are inexpensive things that will be incredibly useful in the long run.
I wouldn’t pay off the lot, since you’re just shuffling cash around basically to get to at least 20% equity in the loan minimum.
Things to make sure you do though in the build.
Big enough garage (assuming you have one), floor out for storage over it. One thing I’ve seen over and over as a realtor are garages too narrow or too short to put 2 full size vehicles in comfortably. You don’t have to heat and cool the storage space but having a good space for Christmas tree storage, etc you’ll thank me for if you haven’t thought of it.
If it’s a 2-story, door to access that space (usually in a closet), if it’s a 1-story, get an attic lift, bought mine from Versa-lift. You only have to fall off a drop stair with a Christmas tree once to know how handy that will be. Best 2 grand I ever spent.
Those are inexpensive things that will be incredibly useful in the long run.
Posted on 8/14/24 at 7:25 am to Rize
I had heard a couple of shady builders locally that went this route except when the house was about complete, the builder opened the house up to other buyers and a couple of people got screwed out of their land. This was when prices for homes was going up exponentially and I wouldn't think builders in this climate would be willing to go this route.
And my $.02 on the paying the property off vs. keeping the money in savings, the entirety of the land and structure are appraised in the final loan. It doesn't seemingly matter if the land is paid off, or if you have the comparable of 20% in land equity/savings account. A bank won't give you a loan on the house without the deed to the land included as collateral. So the final note will have land and structure financed. So my opinion is that you should put the money where it serves you better until it's closing time.
And my $.02 on the paying the property off vs. keeping the money in savings, the entirety of the land and structure are appraised in the final loan. It doesn't seemingly matter if the land is paid off, or if you have the comparable of 20% in land equity/savings account. A bank won't give you a loan on the house without the deed to the land included as collateral. So the final note will have land and structure financed. So my opinion is that you should put the money where it serves you better until it's closing time.
Posted on 8/14/24 at 7:33 am to Brobocop
The land and home cannot be separated on the mortgage. They are one and the same unless you further subdivide the property.
So, regardless of what route you go to get there, the land is appraised and rolled into the mortgage.
For the construction loan, they will appraise your plans + land to determine expected appraisal. Then loan you whatever % (typically 80-90) in individual draws. The bank will pay off the land loan once you get the construction loan and it’s rolled into it.
Any money you put into the land loan now, is just further reduced from the future mortgage. As far as if that’s a good decision or not, it comes down to financial wellbeing, liquidity, and interest rates. 7.5% for the land is a fairly high rate competitively, so it may be worth applying extra money towards the land.
So, regardless of what route you go to get there, the land is appraised and rolled into the mortgage.
For the construction loan, they will appraise your plans + land to determine expected appraisal. Then loan you whatever % (typically 80-90) in individual draws. The bank will pay off the land loan once you get the construction loan and it’s rolled into it.
Any money you put into the land loan now, is just further reduced from the future mortgage. As far as if that’s a good decision or not, it comes down to financial wellbeing, liquidity, and interest rates. 7.5% for the land is a fairly high rate competitively, so it may be worth applying extra money towards the land.
Posted on 8/14/24 at 7:41 am to dlambe5
quote:
Some builders will purchase your property from you then sell it back to you as a package when the house is complete.
Can you give some details on how the contract(s) read for this sale/buyback arrangement?
From 1000 foot view, it seems that unless they were simultaneously executed, with an agreed upon buyback price, what obligates the builder to sell the house and land back to you? Again, just curious.
Posted on 8/14/24 at 8:42 am to Rize
I do construction loans frequently as an investor. I sell the homes and never keep them. I never pay a down payment on a construction loan. Do banks handle this differently for buyers keeping the home when converting over to an amortized loan?
Posted on 8/14/24 at 9:20 am to KWL85
Construction loan rates are higher than your mortgage rate (in a stable rate environment lol). So it would be better to use your down payment cash first before drawing on the construction loan. Then your final (complete construction) appraisal, which includes lot value, will determine how much equity you have considering how much you owe.
Of course OP has a big chunk of equity tied up into the current house which won’t initially be reflected. I’m unsure about this aspect and how it could potentially reflect PMI if borrower doesn’t have enough of a down payment from the lot value.
Of course OP has a big chunk of equity tied up into the current house which won’t initially be reflected. I’m unsure about this aspect and how it could potentially reflect PMI if borrower doesn’t have enough of a down payment from the lot value.
Posted on 8/14/24 at 11:23 am to Jag_Warrior
I don’t know the exact contract verbiage, but it’s in there that the builder must sell to them and it also states that the buyer must buy it if they can afford it. Which a letter from the bank is provided prior to all transactions stating the customer will be able to afford the house.
The builder buys the land for current appraised value. Let’s say that’s $130k. Buyer bought land for $100k. They get $30k and whatever equity to put down on the house. It’s a win win. It’s less risk for the builder because if something happens and buyer cannot afford the house anymore, he then owns the whole thing instead of a house on land he doesn’t own. And the buyer doesn’t have payments with interest on the land while building. (8 months to a year). Also getting equity from the appraised land.
Obviously this doesn’t need to be done if you owe the land outright.
The builder buys the land for current appraised value. Let’s say that’s $130k. Buyer bought land for $100k. They get $30k and whatever equity to put down on the house. It’s a win win. It’s less risk for the builder because if something happens and buyer cannot afford the house anymore, he then owns the whole thing instead of a house on land he doesn’t own. And the buyer doesn’t have payments with interest on the land while building. (8 months to a year). Also getting equity from the appraised land.
Obviously this doesn’t need to be done if you owe the land outright.
This post was edited on 8/14/24 at 11:58 am
Posted on 8/15/24 at 10:03 am to Tifway419
This doesn't answer my question. When are people paying a down payment on construction loans? I get construction loans and sell the house when completed, but never pay a down payment.
Posted on 8/15/24 at 12:38 pm to Brobocop
quote:
I appreciate any insight.
(337) 456-3580 Call Mimi at GMFS. She's in Lafayette and can help you plan/strategize properly. She is very thorough and helpful.
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