Seeking lot loan to build house

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
malenurse
Posts: 7
Joined: Thu Oct 03, 2013 1:24 am

Seeking lot loan to build house

Post by malenurse » Tue Nov 06, 2018 2:30 pm

Hello community,

Just some personal financial/social info about myself:
Married with 1 kid (5 months) living in the Bay Area CA; I’m 32 y.o. I work as an RN and gross 120k+ a year; my wife does not work. We own a house here that we purchased in 2015 with the original principal amt on the loan being 492k, with the current balance now 360k on the mortgage. Our interest rate is .425%. The final ticket price was 615k and since then Redfin claims the current value is around 711k. We have no other debt besides the mortgage (no car loans). We have around 70k in our emergency. We have together around 50k in 403(b), 10k in Roth and 40k in a separate stock brokerage acct.

So we are seeking a 1 acre lot in WA where we want to build our dream house on. The lot is listed as $200k. The lot is forested and will need power and city water extended to it, also a propane tank and septic system installed. As you probably have guessed by now, the house is not in a developed area; it’s in the mountains. However, there are other houses off the street that are all relatively new and established.

So my question is: how should we finance this? We need to secure the lot first before we can build. I’ve been told that lot loans typically have higher interest rates and require more money down than a house mortgage. I’ve heard that home equity loans and HELOC’s are viable options to pursue to get the cash we need now. Our goal is the sell the CA house in a years time. Obviously once the home is sold we’ll have the cash to pay off the lot loan and start the building process.

I appreciate any advice here guys. Thank you very much.

stoptothink
Posts: 4458
Joined: Fri Dec 31, 2010 9:53 am

Re: Seeking lot loan to build house

Post by stoptothink » Tue Nov 06, 2018 2:34 pm

Advice? If you can't pay for the lot in cash, you are in no position to be doing this. Based upon what you stated about income and assets, you are far away from this being a good idea.

Flyer24
Posts: 375
Joined: Sun Apr 08, 2018 4:21 pm

Re: Seeking lot loan to build house

Post by Flyer24 » Tue Nov 06, 2018 2:52 pm

This is a terrible idea. A dream house on a $200K lot while only making $120K? You are going to be house poor. Your total mortgage should not be more than 3 times your salary. You are going to spend a lot just on land prep. The septic alone can run $15K.

Rupert
Posts: 3735
Joined: Fri Aug 17, 2012 12:01 pm

Re: Seeking lot loan to build house

Post by Rupert » Tue Nov 06, 2018 3:02 pm

Sell the current house. With cash in hand, buy the lot. (I know you're in a HCOL and that's very foreign to me, but that sure is a lot of house for a $120k salary. I agree with others that you need more income before the dream house makes any kind of sense.)

barnaclebob
Posts: 3033
Joined: Thu Aug 09, 2012 10:54 am

Re: Seeking lot loan to build house

Post by barnaclebob » Tue Nov 06, 2018 3:05 pm

How much would you spend on the house and lot? What are your other assets?

A 200k 1 acre lot can't be that far out in the mountains in WA. It must still be within driving distance of Seattle so you'd probably be paying Seattle building prices.

User avatar
LadyGeek
Site Admin
Posts: 48601
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Seeking lot loan to build house

Post by LadyGeek » Tue Nov 06, 2018 4:32 pm

This thread is now in the Personal Finance (Not Investing) forum (financing a house).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
Meg77
Posts: 2410
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Seeking lot loan to build house

Post by Meg77 » Tue Nov 06, 2018 4:37 pm

It may be different in other states, but lot loans are common at all the banks I've worked for in Texas. Usually banks want 40-50% down, and often the term is only 1-2 years. The payments can be interest only though. Basically lot loans are considered short term bridge loans until they convert into a home construction loan. Banks do not like to finance undeveloped land over the long term. And yes, the rate will usually be higher than a regular mortgage. Maybe 5-6% but it can vary widely.

If you pay cash, that will be counted as equity toward your inevitable construction loan - and it'll save you some closing costs rather than having to do two loans. But if you have equity in your current home then it would definitely be easiest and cheaper to just get a home equity loan or line of credit instead of a direct purchase lot loan.
"An investment in knowledge pays the best interest." - Benjamin Franklin

delamer
Posts: 6267
Joined: Tue Feb 08, 2011 6:13 pm

Re: Seeking lot loan to build house

Post by delamer » Tue Nov 06, 2018 4:42 pm

Could you qualify for a HELOC with your current income given your mortgage?

That would be $560K in debt on a $120K salary.

And if you got a comparable salary in WA, could you afford to build on your lot?

FlyAF
Posts: 205
Joined: Tue Jan 23, 2018 11:14 am

Re: Seeking lot loan to build house

Post by FlyAF » Tue Nov 06, 2018 4:50 pm

I can't possibly think of a worse plan at your income and asset level. You could end up homeless with an unfinished house. I've lived in a lower (but still high) COL part of CA on your salary and there was no way I would've bought a house as expensive as you currently own, much less think about a custom build on undeveloped land. You are quite simply nowhere near being able to afford this unless you left a digit off of your current salary.

Edit: Are you sure your mortgage interest rate is .425%? :D

senex
Posts: 72
Joined: Wed Dec 13, 2017 4:38 pm

Re: Seeking lot loan to build house

Post by senex » Tue Nov 06, 2018 4:57 pm

It sucks to be house-poor. Prior comments are right about that. You are potentially digging yourself into a tenuous cash-flow situation, both short term and long term.

Why rush into it? Do things in the proper order: sell existing house; move to a rental in Washington; build your dream house with cash and a prudent level of regular financing.

User avatar
unclescrooge
Posts: 2605
Joined: Thu Jun 07, 2012 7:00 pm

Re: Seeking lot loan to build house

Post by unclescrooge » Tue Nov 06, 2018 6:11 pm

I don't think you can afford this, unless there's more to your finances you aren't sharing.

That being said, loans on raw land are often 10%.

$200k for rural land means you should be getting about 20 acres, if not more?

J295
Posts: 1680
Joined: Sun Jan 01, 2012 11:40 pm

Re: Seeking lot loan to build house

Post by J295 » Tue Nov 06, 2018 8:10 pm

Boo to the harsh naysayers ...... I haven't put pencil to paper to figure out if you can do this, but early on in a career/family things are indeed tight ..... We had three kids ages 6, 4, and 2 when we purchased a lot in 1992 at 12% interest rate .... then built a home ... then built a life and now everyone is out of the nest with great memories .... and I retired at 53 .... just plodded along and had some good fortune along the way ....... so it can and does happen ......

My quick math shows you have $300k plus in equity and cars that you own and no other debt. A profession that is portable so income should be pretty steady. You have probably done your own calculations on how much house you can "afford" , and your questions wasn't should I do it, but how to finance.

I would think a HELOC would be your best rate.

Side note: SF/bay area may cool, and quickly .... so you might consider getting out of the home (sell it) sooner rather than later (recognizing that prices may go up and you might say darn in a year, or go down and you'll look really smart) .....

Excited for you and your family .... good luck!

gclancer
Posts: 536
Joined: Sat Apr 27, 2013 10:34 am

Re: Seeking lot loan to build house

Post by gclancer » Tue Nov 06, 2018 8:18 pm

J295 wrote:
Tue Nov 06, 2018 8:10 pm
Boo to the harsh naysayers
Posters on Bogleheads are WAY too conservative. That said, owning a $600k+ house on $120k income is relatively aggressive. Adding a $200k lot on top is a BAD idea. If OP sold his primary residence to purchase the lot outright that would still be a bad idea, but less bad than the current plan.

J295
Posts: 1680
Joined: Sun Jan 01, 2012 11:40 pm

Re: Seeking lot loan to build house

Post by J295 » Tue Nov 06, 2018 9:32 pm

OP. Walk us through your financial analysis on how this will have a successful outcome for you. Thanks.

chevca
Posts: 1918
Joined: Wed Jul 26, 2017 11:22 am

Re: Seeking lot loan to build house

Post by chevca » Wed Nov 07, 2018 10:25 am

$200k for 1 acre?? That seems outrageous... where are you looking?

Let's say you have $350k in equity now. You're talking $200k of that just for the land. Much of the remaining $150k will be spent clearing some space for the home, making a driveway/access way, digging a well or water storage, septic system, running electricity up, and any other prep stuff. You still haven't started building the house yet. How much do you plan to spend on the "dream house" then?

Did your wife work at one point... will she go back to work or stay at home? I can see both points brought up by others... I think it's going to be tougher to afford than you seem to be thinking, OP. I also can see it being doable if things work out right... and, maybe the wife plans to go back to work. Do you have other funds available? A HELOC seems like a good way to go, but you may only get enough then to buy the land. How will you pay for all the prep work mentioned above? Construction loan, I suppose...

Seems kind of risky to me in your current situation, OP. It could work out... but, what if it doesn't?

User avatar
Boomer01
Posts: 136
Joined: Wed Jul 23, 2014 4:25 pm
Location: Oklahoma

Re: Seeking lot loan to build house

Post by Boomer01 » Wed Nov 07, 2018 12:24 pm

Are you looking to build right away? If so, look into a construction loan and include the price of lot in that loan.

That is the route we went when constructing our custom home earlier this year. The loan is capped at your anticipated total loan amount and you make interest only payments monthly on the draws you have taken with the lot being the large upfront draw. We had a 5% interest loan which is a little above mortgage rates, but certainly not 10+%.

The other option would be to do a HELOC on your current home which allows you to secure the lot while you finalize the design and plans.

malenurse
Posts: 7
Joined: Thu Oct 03, 2013 1:24 am

Re: Seeking lot loan to build house

Post by malenurse » Wed Nov 07, 2018 12:44 pm

chevca wrote:
Wed Nov 07, 2018 10:25 am
$200k for 1 acre?? That seems outrageous... where are you looking?

Let's say you have $350k in equity now. You're talking $200k of that just for the land. Much of the remaining $150k will be spent clearing some space for the home, making a driveway/access way, digging a well or water storage, septic system, running electricity up, and any other prep stuff. You still haven't started building the house yet. How much do you plan to spend on the "dream house" then?

Did your wife work at one point... will she go back to work or stay at home? I can see both points brought up by others... I think it's going to be tougher to afford than you seem to be thinking, OP. I also can see it being doable if things work out right... and, maybe the wife plans to go back to work. Do you have other funds available? A HELOC seems like a good way to go, but you may only get enough then to buy the land. How will you pay for all the prep work mentioned above? Construction loan, I suppose...

Seems kind of risky to me in your current situation, OP. It could work out... but, what if it doesn't?
Forgot to mention, yes, my wife is an RN like me and, up until our kid was born (he’s 5 months), she was working full time with the exact same income as me. That is how we we’re able to gain equity in our house relatively quickly. We also put 123k down on the home when it was purchased. Our parenting plan is to always have someone around to raise the kid, but that being said, she is currently looking for per diem positions to support our financial goals. No other funds available then what is mentioned.

AlphaPilot
Posts: 41
Joined: Wed Jun 20, 2018 8:29 am

Re: Seeking lot loan to build house

Post by AlphaPilot » Wed Nov 07, 2018 2:53 pm

When building a home and leading to that decision, emotion takes over common sense more than we want to admit. You find "THE LOT" the perfect one, you start planning. And you do not stop. I know from previous experiences. You even start planning things in your subconscious. It puts blinders on your future predictions. Everything becomes focused on how the perfect piece of land will allow the perfect view, commute, family layout, hosting, parties, holidays, etc. We throw out the fact that we spend more time working than we do AWAKE at home. Sleeping added in of course changes that, but we sleep in a King or Queen standard sized bed, well, most of us do. It is irrelevant of the house location, square footage, cost, etc.

All this said, DO DREAM. Do go for this. But do it with full understanding of how much overtime it may require, what compromises you will make, how much you are willing to owner-build, and how much of it you are going to hire out.

I am not saying that 200k lot is the wrong lot, since we all have requirements unique to us. But do some looking if you have not already, are there other lots that are similar distance to location of work? It's good to have the land bought and no longer part of your figures. Knowing you are going to build a house changes significantly once you OWN that land.

You are an RN, you've gone through schooling. That shows diligence. Have you considered doing any of the building yourself? Do you realize how much information is out there if you study? Even going from knowing nothing to knowing how the process works can save you a lot of money when you decide on a general contractor or when you decide to be your own general.

$200k for land is a lot of money, but I live in a LCOL area. $200k will pay for all materials to build a 2k square foot home here. ;)

Like other suggest, sell your current home while the market is still good. It may go up, but it can just as much go down. Lock in where you are at, and find the most affordable place to rent either in your current location or near your build site. Start being as frugal as you can to help support all those plan changes for construction. For the delays. For the splurges. Save, save, save! Invest confident that you will NOT lose your principal. Don't be afraid to look around at other pieces of land, either!

Walkure
Posts: 46
Joined: Tue Apr 11, 2017 9:59 pm

Re: Seeking lot loan to build house

Post by Walkure » Wed Nov 07, 2018 4:10 pm

Really great thread. I've been considering something similar to OP myself. East Coast HCOL area, similar income, a bit more in savings, but no existing home or equity therein; looking to move from renting to starter home, which in our built-up neighborhood start around $500k for an 80-yr old tiny cape cod that needs work. There are a handful of unbuilt infill lots with existing city utilities that occasionally come up on the market for $275-350k. It seems like one could easily build something of comparable size new for $150-225k and come out to the same total cost. Will definitely be following this conversation...

Marlago35
Posts: 3
Joined: Wed Sep 26, 2018 11:51 am

Re: Seeking lot loan to build house

Post by Marlago35 » Wed Nov 07, 2018 4:55 pm

It's not a process for the faint of heart. We cleared raw land and built a home 3 years ago, had a seemingly larger financial cushion and more local construction/banking connections than you may have. Not to say it can't be done, but go in with your eyes wide open about the impact this will have on your current and future finances, relationship with your spouse, time comittment required, etc.

Some ideas from my chair:

- Get a local real estate agent to comp your current home in CA. This will help you understand how much money you'll actually walk away with. Make sure to factor in closing fees, taxes if applicable, moving and storage costs, etc.
- Call some community banks and credit unions in that part of WA and ask if they offer construction loans or land loans. If so, ask about the rates and terms. We got a Construction to Permanent (30 year fixed) loan, but already owned the land outright having paid for that with cash. This will lock in your rate up front and you'll only have 1 set of closing costs instead of two. YMMV on how much down payment these banks will require. It could be multiple hundreds of thousands of dollars, FYI.
- Price out home rentals as close to your proposed lot as possible in WA. You want to be going to the site daily once construction starts to keep an eye on things and ensure it's being done to your standards and specs.
- Don't get attached to that specific lot. Shop around. Sounds like undeveloped area so should be other lots nearby. If you are set on that lot, try to get it for less than listing. Go in offering $150k. Don't be afraid to walk away.


Honestly if you're still not dissuaded that this point, there's an entire new set of things to think about including finding a reputable and trustworthy local builder, signing a contract, choosing the design, assembling a build budget, staying on budget, etc. Keep in mind that running new utilities, a long driveway, landscaping, septic, etc. are going to add up fast. Also, even after you move in to new construction there's an entire new list of things you still have to purchase/install like window treatments, furniture to fit the new space, decor, etc. that likely aren't budgeted into your loan. We're still spending a decent amount of money each year for interior and exterior costs that friends and family who live in older homes simply don't have to think about. I've heard it takes ~ 5 years to get a new construction home to a place where you want it and it sounds about right to me.

Good luck. We made it through the process alive and still married but will never do it again! Any spec homes in the area to buy instead? PM me with specific questions.

Post Reply