Buying land, on which to build a house, is more challenging for most people than buying an already built home. Financing the purchase will generally require a greater down payment and will likely have a higher interest rate. If the land was not purchased with a construction loan, getting a construction loan to finance building a house will probably require getting the lender to approve the plans and will be more challenging than a purchase loan for an existing house.
Land Loan
There are five common ways to finance a land purchase
- Lender land loan, typically from a community bank or credit union. Local lenders can better assess the value of the land.
- Home equity loan. If you have a home with significant equity, it would probably be easier and cheaper to get a home equity loan.
- Seller financing. Most sellers aren’t in the lending business but they may be willing to offer a short term loan.
- USDA Rural Housing Site loan. If you are planning to build a primary residence in a rural area, the USDA offers Section 523 loans for people who want to build a home themselves or Section 524 loans for people who hire a contractor. They are intended for low to moderate income families and need to be repaid in two years.
- SBA 504 loans. If you are going to use the land for your business, you may qualify for a U.S. Small business Administration loan.
Construction Loan
A construction loan is similar to a line of credit. You are loaned the money needed to complete each step of the project as you progress rather than receiving all of the money up front. The loan is a short-term loan and is typically interest only but has a short duration, ending when the construction is complete. To retire the loan you will typically have to apply for a new mortgage on your newly completed home.
Sometimes the construction loan and the loan to replace it are applied for at the same time. This is referred to as a one-time close construction loan, all-in-one, or construction-to-permanent loan.
Buying Land To Build On
In San Mateo County there were 90 “lot/land” parcels listed on the MLS in 2019 which sold. Many of these were on the ocean side of the Santa Cruz Mountains. In Santa Clara County there were 89 “lot/land” parcels listed on the MLS in 2019 which sold. Many of these were in the mountains or at the far south end of the county near Morgan Hill or Gilroy. There are very few opportunities to buy unimproved land in Silicon Valley.
The majority of people in Silicon Valley who want to build a custom house focus on buying a home which is for various reasons somewhat undesirable and plan on demolishing it. Juliana Lee bought an old home in downtown Palo Alto, demolished it, and built a custom home for herself to live in. Several of her clients have also bought homes, demolished them, and built new custom homes.
The Juliana Lee Team has very little experience buying rural, unimproved land. We recommend you find a real estate agent experienced in selling rural unimproved land in the area where you want to build if that is where you want to live. Those agents will have experience with which to guide you for issues such as getting utilities to the land.