How to Buy Land and Build a House

This blog post was created to reflect the information from our webinar, How to Buy Land and Build a Home

Buying land or building your own home can be a very rewarding process, but one that involves a lot of attention to detail. Whether you are currently in the process of buying and building, or planning to do so in the future, this article provides an overview of things to consider when buying land and tips for building your dream home.

Table of Contents: Click the link below to jump to your question!

How to Find a Property

There are many ways to find property to purchase including:

  • Online
  • Through a realtor or builder 
  • Word of mouth in your community

When looking online, you can simply search for property for sale in your area. If you are working with a realtor, it is important to connect with them early, so they know your criteria and can flag properties that match what you are looking for as soon as they become available. If you already have a builder, it would be beneficial to consult with them as well, as they typically have many contacts to help you network. They’ll understand how to find land that can support building a new home and may be able to point you in the direction of lots for sale.

Another way to find property for sale is to ask around in your community. Some people may have land that is for sale that they have not listed yet or would rather sell their land to someone they know privately. Building your network and community will help you learn about this untapped sale method.

As you search for land, this is also a great time to start working with a lender. A pre-qualification will help you determine how much you may be approved for before you find the land you want to buy. Then you can create a budget and prepare for the loan amount. Learn more about how to buy land here.

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What to Consider When Buying Land

One of the most important things to consider when buying land is the location. You should determine where you would like to live and what factors are important to you before starting your search. Would you prefer to live somewhere more rural or right outside of a city or town? Will this make your commute longer or shorter? How close are you to amenities like grocery stores, hospitals and schools?

You will also need to pay attention to the zoning of the property. Is it agricultural or residential? These will both typically be acceptable to build on, but may differ in the amount of acreage that is attached. If you need more acreage to grow crops or raise cattle, an agricultural zoning will be a better fit for you. Each comes with their benefits and limitations, so make sure to do your homework.

Another question to ask is whether or not the land is Perc’d and does it have a well located on the property? If the house has not been Perc’d, you will not be able to build because you will not be able to have a septic system. If it has been Perc’d, the listing will tell you how many bedrooms can be supported on that piece of property. The listing will also inform you if it has a well. If it does, you will see GPM, which stand for Gallons per Minute, and is measured in a ratio.

You will also want to look into is what utilities and road options the property offers. Has the driveway been established and will you have to share it with your neighbors? Are there utilities already on the property or will they need to be added? Easements are also important to evaluate before picking a property. Easements are the limitations of what you can do with the property. For example, if the property is located in Forest Conversation, you will not be able to remove any wooded area from the property.

In addition, surveys may be required for title work for the property. A house survey will determine where the house location will be on the land. This is typically completed quickly and is not expensive. A metes and bounds survey assesses property lines and land markings, is typically more expensive, and can take a longer time to complete. Surveys are not always required when purchasing land, but this is dependent on the specific property.

Pros and Cons of Building a House

Choosing to build a house is a very personal decision and there are many pros and cons. The benefits of building a house include being able to personally customize the features and design, less short term maintenance and a higher level of energy efficiency. Some drawbacks include a longer wait time to move into the house, how stressful the process can be, and the potential for hidden costs you are not prepared for. It is very important to understand the time investment and overall cost it will take to build a home.

Is it Cheaper to Buy or Build?

This could vary depending on where you live, but it will likely not be cheaper to build a home versus buying a home that is already built. The overall cost is dependent on the current market conditions. Recently (2021), land is selling for a premium and raw materials, like lumber, have seen all-time highs. Properties are in high demand and are selling for above the original asking price. During the COVID-19 pandemic, raw materials were often back ordered and more difficult to get in a timely manner due to shut downs. There can also be additional fees when you build a home that you didn’t expect initially. Impact fees or township fees, depending on what state you are located in, are dependent on your county and are paid directly to your county depending on your household. This fee goes toward schools, roads and any county facility. Also, building permits, architectural fees and excavating fees will need to be paid up front. These fees will differ depending on the type of home you build.

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How to Choose a Builder

Once you have bought the land, you’ll want to get to know potential builders to determine who you’re most comfortable with. Do your research about the company and what they have built previously. Start with a quick internet search and request referrals so you can speak with a client they have serviced in the past. If you have the opportunity, you may want to walk through properties they are currently building.

You’ll also want to make sure you understand the contract, the builder’s plans and the timeline before you sign on the dotted line. To end up with your dream house, you need to understand what the builder is doing and why they are doing it in that way. This will also help ensure that the builder sticks to the timeline you agreed upon.

Additionally, prepare to have saved cash reserves for unexpected costs that could occur with building a home. Having a cash buffer will help you pay for those costs quickly to stay on track with your timeline. There will also be upfront fees that are required in your county and state that you’ll want to prepare for.

Lot Loan Options

Before needing a construction loan, you may need to start with a lot loan to purchase the land you want to build on. Farm Credit offers lot financing with a 20% down-payment with five, ten and 15 year fixed terms. It must be established as a buildable lot, which means it has already been Perc’d. But, you do not need to have a timeline for when you are planning to build. This means that you can wait for as long as you need to start building your home.

Construction Loan Options

Farm Credit offers 15 and 30 year construction-to-perm loans. During the building phase, you will only pay interest. This means once you have finished the 12 month construction period, the loan will revert back to a 15 or 30 year term. You must have a registered builder - no self- building is allowed. You can clarify if your builder is registered by checking your state’s attorney generals website by searching your builder’s name. Farm Credit will finance up to 95% of loan to value, which is determined by the appraisal. Mortgage insurance and escrows may be required depending on your appraisal. There will also be a 10% cash reserve requirement before receiving the loan. This will ensure that you have some funds in case of an unexpected cost.

Loan Approval

Before you can get approved for a loan, you’ll want to make sure you have a good credit score - this means 700+. Before you are approved, you will also be evaluated based on the cash you have on hand. If you have more cash on hand but a lower credit score, this may help you get approved. You will also be evaluated on repayment ratios. You do not want your debt ratio to be over 40%. The debt ratio is determined by taking your housing cost plus any other loans and credit cards you have and dividing that by your gross monthly income. Your lender will also ask for supporting financials like tax returns, W-2’s, bank statements, paystubs, and profit and loss statements, if you’re self-employed.

Things to Avoid when Buying a Home

When buying property, building a home or applying for a loan, you should avoid making expensive purchases. Big expenses could affect your ability to get approved for a loan, so be sure to check with your lender before doing so. It is not recommended to get a new job, switch banks or move money around within your bank accounts. All of these actions could cause a delay in getting a loan or not receiving one at all because of how it affects your credit score. A lender will be notified with any change in your credit during this process.  

Things to Do when Buying a Home

To increase your likelihood of being approved for a loan, make sure to make your current payments on time, especially your rent or mortgage. It is also important to keep all paystubs and bank statements in case your lender needs them for evaluation. Also, returning all paperwork on time will help keep the processing moving. These actions cannot guarantee a loan, but can certainly help you and your lender. 

Sample Draw Schedule

A 12 month construction loan comes with a sample draw schedule to prepare you for your building process. Each percent listed below is a typical example of how much of your loan would go towards that part of the building process:

20% will go toward the foundation draw, which is site preparation, excavation, footings, foundation walls, and waterproofing.

20% will go toward the framing draw, which includes outside and inside wall framing, roof framing, roof sheathing/felt, and roof shingles.

The windows and door draws receive 10% of the loan, which includes installation of the windows, exterior doors and skylights.

25% will go toward the drywall draw, which is the basement and slab concrete, rough-in plumbing, rough-in electric and wiring, rough-in HVAC, exterior siding being completed, outside wall insulation, drywall hug, drywall finished and ceiling textured, and well work and septic.

15% will be for the trim draw, which is the interior doors, interior trim, cabinet installation, and counter tops being installed.

10% will be the final draw, which will be the completion of the home according to the construction contract, including the seeding, grading, driveway, carpeting, resilient flooring, and final approval from all inspecting authorities in the county where the house is built.

At the completion of the house, it must also have a certificate of occupancy, which will be provided by the County or Township Authority. Everything must be compliant with their codes before you will be approved to move into your home.

Buying land or building a home can seem overwhelming but with careful preparation it can be a fulfilling process. To learn more, register to receive our webinar replay, presented by MidAtlantic Farm Credit Loan Officers in Frederick, Maryland, Kelsey Maslen and Denise Karanikas.

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