Banker explains how you buy land to build a dream home

Mortgage banker: Harry Sessa

Purchase price: $125,000

Loan amount: $93,750

Loan type: Conventional fixed rate lot loan

Background: Harry Sessa had a couple contact him with a request to be prequalified for a new construction loan. However, before they built their dream house, they were seeking financing to purchase the approved building lot they found.

Lot loans are somewhat of a specialty in residential financing. Over the past few years, some lenders have dropped lot loans from their collection of products. Sessa’s company, United Bank, still lends on land, however, the land has to be an approved building lot for the construction of a residential dwelling.

Sessa explained they would have to put down a minimum of 25 percent to secure their lot loan.

Since the borrowers were not immediately ready to build, Sessa informed them they would have to pay the real estate taxes in addition to their lot loan payment. They were happy to find out the equity they put into the lot would be considered in the loan-to-value calculation of the new construction loan financing as well.

Sessa was able to offer a 15-year fixed lot loan. They would make payments only until the lot loan was paid off with their new construction loan. Once the construction loan closed, it would pay off the lot loan.

Six months after closing on the lot loan, the borrowers found an architect who designed the perfect home so they were ready to make an application for a new construction loan.

They needed to provide the standard documentation, which included pay stubs, W-2s and assets statements required for any home loan as well as plans and specifications for the building, contractor’s license, contractor’s insurance, etc.

The final determination of value is the lower of the actual cost to build the home including the cost of the lot or the appraised value based on the plans and specs. The maximum loan-tovalue is 80 percent.

Building a home can be more stressful than purchasing an existing home because you have to make a lot more decisions, but in the end, you get exactly what you want.