How Do Land Loans Work When Planning to Build a New Home?
Your ultimate guide to land loans, construction financing, and building your dream home in California.
Table of Contents
- What Is a Land Loan?
- How Do Land Loans Work?
- Two Main Paths: Buy Land First or Finance Both Together
- Construction Loans and One-Time Close Options
- Step-By-Step: From Land Purchase to Move-In
- Loan Requirements: What You Should Know
- Down Payments, Rates & Terms
- Frequently Asked Questions
- Interactive: Land Loan Calculator & Checklists
- Placeholder Images & Videos Guide
What Is a Land Loan?
A land loan is a specialized loan product used to finance the purchase of raw land or a lot. Unlike a traditional mortgage loan, land loans are designed for borrowers who plan to build a new home on the purchased property, either immediately or in the future.
Types of Land Loans:
- Raw land loans: For undeveloped land without utilities or improvements.
- Lot loans: For plots that are ready for residential construction or have some improvements.
- Construction-to-permanent loans: Combine land purchase and home construction in one loan.
How Do Land Loans Work?
Land loans function differently from standard home mortgages. Here are the key steps:
- Loan Application & Approval: Lenders review your credit, down payment, and plans for the land.
- Higher Down Payments: Typically 15-25% or more, since land is considered higher risk.
- Shorter Terms: Land loans often have terms of 1-5 years, sometimes up to 15 years.
- Higher Interest Rates: Rates are generally higher than regular mortgages.
- Conversion or Refinance: Once you’re ready to build, you may pay off the land loan with a construction or construction-to-perm loan.
Two Main Paths: Buy Land First or Finance Both Together
Option 1: Buy Land Now, Build Later
- Secure your ideal location before it’s gone.
- Use a land loan to purchase the property.
- When you’re ready, roll the land loan into a construction loan or construction-to-perm loan.
- Flexibility to finalize plans and save for construction.
Option 2: Finance Land and Construction Together
- One-time close construction-to-permanent loans cover both land and building costs.
- Only one application and one closing, saving time and closing costs.
- Begin building immediately after land purchase.
Construction Loans and One-Time Close Options
What’s a Construction Loan?
A construction loan finances the building of your new home. It’s a short-term loan (often 12-18 months) that pays contractors in stages (called "draws") as work progresses.
Construction-to-Perm (One-Time Close)
- Combines land purchase and build costs into one loan.
- After construction, automatically converts to a standard mortgage.
- Avoids two sets of closing costs and paperwork.
California Construction Loans Advantage:
Our experience and lender network allow us to offer:
- 80% LTV up to $3 million for construction-to-perm loans.
- Finished value appraisals (higher loan amounts, lower cash needed)
- Owner-builder options for qualified clients.
Step-By-Step: From Land Purchase to Move-In
| Step | Description |
|---|---|
| 1. Get Pre-Qualified | Assess your budget, credit, and down payment. |
| 2. Find & Secure Land | Work with a Realtor to purchase land. |
| 3. Choose Financing Path | Land loan first, or one-time close construction loan. |
| 4. Complete Due Diligence | Survey, zoning, utilities access, soil test. |
| 5. Design Your Home | Finalize plans, work with architects/designers. |
| 6. Select Your Builder | Vet and choose a reputable builder. |
| 7. Apply for Construction Loan | Submit plans, specs, builder contract. |
| 8. Start Construction | Loan funds are released in draws for each stage. |
| 9. Convert to Mortgage | Upon completion, convert to permanent mortgage. |
| 10. Move In! | Receive certificate of occupancy and enjoy your new home. |
Loan Requirements: What You Should Know
- Down Payment: 15-25% for land loans, as low as 5% for construction-to-perm (depending on program).
- Credit Score: Typically 680+ for best rates; some lenders require 720+ for land-only loans.
- Income/Debt: Strong income and manageable debts (DTI generally under 43-50%).
- Builder Approval: Lenders must approve your builder/contractor.
- Plans & Permits: Finalized plans, specs, and building permits required for construction loan.
- Location: Land must be buildable; check zoning and utility access.
Down Payments, Rates & Terms
| Loan Type | Down Payment | Typical Term | Interest Rate |
|---|---|---|---|
| Land/lot loan | 15-25% | 1-5 years (up to 15) | Higher than mortgages |
| Construction-only loan | 20%+ | 12-18 months | Variable |
| Construction-to-perm (OTC) | 5-20% | 30 years | Fixed after conversion |
Example: Building a $1M Home on $300k Land
- 20% down on land ($60k), 20% down on construction ($140k)
- Total cash needed: $200k
- Finance the rest with a construction-to-perm loan
Frequently Asked Questions
1. Can I build on land that’s not paid off?
- Yes. You may combine your land loan with a construction loan, or pay off the land separately and use the equity as your down payment.
2. What if I’m not ready to build yet?
- Secure the land with a land loan. Build equity, then refinance or convert to a construction loan when ready.
3. Is it cheaper to build or buy?
- Building is often more expensive, but you get a custom home. Costs depend on location, land development (utilities, permits), and construction choices.
4. How long does it take?
- Land purchase: 30-60 days. Construction: 8-14 months typical. Allow extra time for permits and builder availability.
5. What documents do I need?
- Land purchase contract, house plans, builder contract, cost breakdown, proof of income, credit check.
California Construction Loans, serving California families for 40+ years. Call us at (619) 855-6091 for your custom scenario!
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