Designing and building your own home on a plot of vacant land can be hugely satisfying. But unless you've done it before, the process can be confusing. Before purchasing vacant land, you'll probably want to check into:
We'll offer detail on these matters below.
Start by doing some information-gathering on the area where the land is located. Some issues to look into are similar to what you'd consider when buying an existing home. For example, is the local government well run, or will it make your life difficult when you need permits or variances? Is public transportation conveniently located? What about nearby schools, shops, parks, grocery stores, and sources of quality medical care? The joys of rural living can be seriously diminished if you'll be spending half your time on the road.
Investigate the immediate vicinity of the vacant land for concerns like landfills, noisy highways, or industrial uses. Maps and aerial surveys prepared by FEMA or Google or found on the town clerk's website can be helpful.
On the plus side, you might find that the plot is near conservation land or other protected resources, meaning you'll enjoy green space around you far into the future.
You'll want to know whether you or your general contractor will need to obtain permits or approvals other than the building permit itself, most likely for:
There are many ways to finance the purchase of vacant or undeveloped land. The most common are:
Here are suggestions about how to qualify for them.
A seller of vacant land—especially one who is highly motivated to sell—might be willing to provide financing (purchase money financing) to a qualified buyer, for some or even all of the purchase price. Here, "qualified" means any criteria that will satisfy the seller that you can be counted on to repay the loan.
Since the seller has already determined the land's market value , you won't need to obtain an independent valuation in order to confirm its worth as loan collateral. Be prepared to demonstrate that you have good credit (as in, a high credit score and solid credit history, or letters of recommendation from banks, tradespeople, and such), and that you will be able to repay the balance of the loan when it comes due (with such evidence as tax returns or W-2 statements showing income sufficient to pay for the periodic interest on the loan).
Because the land itself won't generate income, showing the seller a construction-financing commitment from the bank to cover building costs will be very helpful.
A lawyer can be worth bringing in, for both you and the seller. You'll both want to be sure that basic terms, like price, term, interest rate, and when and how payments of interest are to be made, are included in the promissory note. The mortgage, which secures the note with the land, will be recorded; you'll want to take particular care with the description of the premises, event of default, and other standard mortgage terms.
Qualifying for bank financing for the purchase of vacant land usually requires showing excellent credit, income sufficient to pay for the interest that the bank will charge for the loan so long as it is outstanding, an appraised market value for the land that exceeds the principal amount of the loan, and a plan to pay off the loan.
You will need to provide the bank with evidence of income (tax returns, W-2 statements, and so on) that meets its income-to-loan ratio requirements (your total monthly debt payments, including the interest on the new bank loan, divided by your monthly pre-tax income, typically 30% to 40%). The bank will obtain (and you will pay for) copies of your credit score and history and a property appraisal.
If seeking construction financing from the same bank, it will also ask for engineered construction plans and detailed construction cost estimates. Your architect or builder's construction plans and other documents will determine the estimated cost. In addition to the costs of construction, the bank will likely insist on reserves, including:
After all, both you and the bank want to be confident that there are sufficient funds available to finish the project even if there are cost overruns or if the unforeseen happens, like your builder going into bankruptcy. If the project comes in on budget, you won't need to draw down the reserves. On the other hand, cost overruns that exceed the contingency reserve will be your responsibility to pay.
If obtaining construction financing from a different bank, or if you don't have immediate plans to build, the bank financing your land purchase will probably expect an even better credit record and history and ask for a lower income–to-loan ratio. (It will want more collateral for every dollar you intend to borrow.)
If you already own a home, and if, over time, have built up some equity (either by paying off your mortgage or because the property has appreciated in value), consider a home equity loan or equity line of credit on that property as a source of financing for the vacant land purchase.
Your bank's lending requirements are likely to be less onerous than if you were applying for a construction loan or for permanent (long-term) financing for a new home. That's because your bank has already determined your creditworthiness and appraised the value of your existing home when you first bought it.
Expect the bank to ask you to update your credit and income documentation (recent tax returns, W-2 statements, and so forth). As with new financing, the bank will likely look for an income-to-loan ratio of 30% to 40%.
Both the federal and states' governments protect a number of endangered species and their habitats. (County and smaller governmental bodies usually don't.) Some endangered species, like the bald eagle, are famous; others, like grey wolves, are the subject of contention, with farmers and ranchers fearing threats to their herds.
Information from the U.S. Fish and Wildlife Service can help you locate federally protected endangered species near you, and explain the kinds of protections that the government will enforce (for example, limits on numbers of the species that can be "taken," or minimum distances between endangered habitat and new construction).
The news isn't always bad; the U.S. government offers grant or loan programs to finance protection of endangered species and their environments during new construction. Often, property improvements that protect endangered habitats can also improve storm drainage or reduce damage from soil erosion.
Many states protect a longer list of endangered species than the feds. Check your state's maps and lists. And again, look for grant or loan programs that will defray or cover the cost of protecting endangered species on your land.
Almost all government agencies enforce their endangered species regulations by granting or denying permits that are specific to proposed construction or other activity. If your land is home to an endangered species, you might need to obtain one or more permits before going forward. The permits might limit the location of new construction or require special protections, like hay bales, during construction.
Building without approval on a piece of land that contains an endangered species or its habitat is an invitation to disaster. If in doubt about whether your plans are legal, consult an environmental engineer or an environmental biologist.
It's wise to get legal and other professional help with this process. Even after the land sale has gone through, an attorney might be needed, to make sure you don't miss something important regarding:
There are numerous potential issues when building on vacant land, but having the right real estate attorney available to help will make the process much easier.
Need a lawyer? Start here.