Land Loans Build Your Dream Home - Basics of Financing Land

We're building on your own land is your dream, and that is what is going to happen. Then you need to watch this episode because we're going to go into some detail talking about land loans, how to finance them, the ins and outs. And I've got a really special guest today. So Jordan Monroe, my friend here in Texas, he's with Pinnacle Bank. Where do you guys land currently? We are all over Texas, but we can also land in Nebraska, Wyoming, Utah, Arizona, Colorado, and so lots of different states that we lend in. I want to put a house right there on top of that mountaintop. So this is your website, Pinnacle Bank, and that beautiful land that we're looking at right now is actually what we're talking about. So the first question, again, is traditional mortgage versus a land loan. Tell us. So a land loan, that's a broad term for a lot of different kinds of property, right? And so on the conventional mortgage side, you have lots of different products where you can use your expertise to put your client into the exact right situation, right? You have FHA, VA, conventional, Fannie Mae, Freddie Mac, all these different kinds of loan programs that help somebody get into a home, but they have specific requirements. And so sometimes land pushes outside of that, and that's where we come in. So Pinnacle, when we do a land loan, Pinnacle is going to hold onto that loan versus on the more conventional mortgage side, that's going to be sold to an investor and securitized and all of that. A land loan can be a catch-all for different kinds of properties that cannot be financed through conventional mortgages. Okay, cool. And it's just land on it, right? So the conventional loans don't even, you don't have a property on it. It's for single family residence. There's no residential requirement. So depending on what you want to do with that land, we would go in different directions, but there's no requirement that there's a house on it in order to get financing. I don't do land loans. I always point them to you, like to a bank, a credit union, to a smaller... You need to really, wherever the land is, and it doesn't matter really how many acres, would you agree that a bank that operates in the area where the land is, is where you need to go? That's number one. Sure. Yes. Absolutely. Is that right? Yeah. Number two, I think there's a misconception that it's super easy to finance land, and it's really not. Let's say there were 10,000 lenders out there. I know there's more than that, but only one does land. Not everybody does land, and it's really meant for these smaller regional banks like Pinnacle, for example. I mean, that's really y'all's wheelhouse. Is that right? Yes. And I think because of all the different... One of the first things that I ask when I'm talking to somebody about land loans, what is the purpose of it? Because maybe you've inherited, like you said, and you're going to build your dream home, or maybe you have aspirations to develop that and do investment properties and multifamily on top of that, or maybe it's just recreational in nature, or maybe it's for farmland, and so you're going to be dealing with ag exemptions or wildlife exemptions. And so the purpose can get really complicated, and that's why I think it is a specialty loan that not a lot of people want to deal with. Yeah. When should you consider a land loan? The first answer to that that I think of is it gives you... If you need to be fast, let's just say it's a waterfront lot, right? It's a super desirable lot that's just come on the market, and you dream of being there and building a home on it, but you don't have your budget and your plans and your specs all together to build on that lot, a land loan doesn't require any of that, right? You're just securing the land so you can move very quickly, so you don't have to have all your ducks in a row with your build in order to buy that property, and so that's a good reason to use a land loan. Another reason is, let's just say you're two or three years away from building because you want to save, or whatever the situation is, a land loan gives you that time, a land loan provides you that time to secure that property. There's a lot of other reasons, for instance, on a residential side, there's this requirement that the home that you're buying, when you're getting a mortgage, that it's residential in nature, but not everybody... Some people operate a business nearby on the land, or they're farming, and give you flexibility to then get a primary, on your primary home, a more conventional loan, and it gives you flexibility in that way. So let's talk about down payment, because I think this is where a lot of people don't really understand, especially homeowners that don't have a ton of cash, and they want to get in, and they're like, we want to build our dream house, we don't want to do a track builder, cookie cutter, pretty much stick built house, right? They want a custom home, but to get the land, I mean, you do have to put a down payment on the land, it's minimum 20%, right? Or most of the banks are 30%. Minimum of 20, it's going to be a bit more dependent on the situation, what kind of property and what the plan is for that land. Okay, 20% minimum. So I want to give you an example for those of you watching, if the land is $50,000, 20% of that is $10,000. So you need to really be aware, if it's $100,000, 20% of that is $20,000. Now when we talk in the later, you know, after we talk about the land, I am going to touch upon construction. So you want to stick around and I'll talk about how that money that you pay up front can credit to your equity for when you do the construction loan. But that's the basics of number one, is that when you buy the land, most of the time, most sellers, they want their money fast and they don't want to wait around 60 to 90 days for you to get plans and get the construction loan all together, right? That's right. And sometimes even longer. And we'll go into that. Depending on what kind of project you're working on, you know, architects, that can take a little while. And so it really can help you get in quickly. So for land, that's what you can expect. And you know, there's closing costs on the land too. Now, closing costs are different from bank to bank, so I'm not really going to quote those at all. But I mean, and it's hard to quote a percentage because obviously land prices are a little bit different, but you've got the 20 percent plus you've got admin fees, you've got title company fees, attorney fees, right, filing fees. So these things can really add up. So if you're considering land, you want to first get with the entity, the bank, let's say, that is going to help you finance. But you've got to expect 20 percent plus closing costs on top of that. But again, later on, you could credit a lot of that or all of it really can be a credit towards the construction, which we'll talk about here in a few minutes. When you're looking at land, what's kind of an important thing from your expertise? Because again, you deal with this more than I do. When you're looking, you should be worried about easements, zoning, HOAs, like what should you really kind of be looking for when you're looking at land? Yeah. Very important. Easements is a great start. A lot of times, you know, people inherit land. And I've seen this many times where, you know, land that maybe has been in a family for generations inherited down. There isn't always ingress and egress, you know, easements kind of ironed out in title. And so that becomes an issue later on when you're trying to get your conventional financing or your construction loan. And so that is definitely something you want to work with a title company on when you, you know, when you're when that land is being put into your name, whether it's a purchase or whether it's, you know, inheritance, making sure that you have proper ingress and egress. So what does that even mean? Yeah. What's ingress, egress? So I'll give you an example of somebody that I'm working with. He inherited some land that was across some train tracks that's been in the family for over 100 years. He wants to build a home on and so the family's in the process of doing that. Title company informed them that there was not a proper easement over the train tracks and that it was grandfathered in, but they were having trouble with their title insurance because of and so ingress and egress on and off the property, so to speak, making sure that you have legal access through, you know, an entryway to your property. So somebody can't, somebody, you know, a neighboring property owner can't remove your access to your property. And so an easement is something that is important to have that, you know, it's a legal right of way to your property, even if it means going over somebody else's property, you know, make sure you have legal access to your property. Okay. I actually did a construction loan way back when and I remember there was a dispute because there wasn't, it was, it must've been just that if there wasn't access, the person couldn't access the property without going on someone else's property that was private, like there has to be a public entrance, right? So yeah. Or legal access across somebody's property, which, you know, that's, that can be part of it too. HOAs is another really important one. Another example I'll give is had a young couple who wanted to buy four acres to build their home and the in-laws home on the property. That was their plan, but it turned out in that area, it was a minimum of three acres per homestead and they were buying four and they wanted to put two homes on it. So that became an issue. They had to work with the city on that. So zoning, same kind of thing, you know, is it zoned for what you're trying to do with that property? You want to make sure that you have the proper zoning, easements, flood insurance, flood zones, another really important one. When you have land, you don't need to have insurance on it if there's no, you know, homestead on it. But the moment you, you know, build a home on it, obviously insurance is important. And if it's in a flood zone, flood insurance becomes a requirement. And so knowing if when you're buying that land, where you want to put your home, knowing ahead of time, is that going to be an issue later on? So you want to be thinking about what is the purpose of your land? What's the future look like for your land so you don't run into an issue later? Yeah, those are definitely things to consider. So basically to sum it up, what I got is well, first of all, people need to realize 20% is the minimum on land loans. And the financing terms are different, isn't it? Usually 20 year amortization or do you do it differently? 20 year am, yep. And so versus 30 year fixed payment. So you're paying on that land until such a time that you roll into your future construction loan. So like, how long is that? Is it going to take you? Some people sit on it and it's two years. Some people want to start building right away, right? So it's a big thing to talk through with the bank that's going to do the lot and that may be the same place that's going to do the construction loan or someone like me, right? Where we work together with the bank to do the lot and construction loans. So in summary, I heard different financing terms. And then something that someone might not think about is like, look, you've got to really get a copy of those ownership documents. Is there an HOA, Homeowners Association? There may not be. As you get real outside of town, there's usually not. But that ingress egress, working with a title company, there's a lot of people that inherit land a lot. And I think that's something that's probably overlooked. They think, oh, I'm just going to quit claim deed and I'm just going to deed it over. And then you get this property that you have to really unravel a whole rat's nest of, can I build on it? Can I not? So getting a title company involved, really imperative is what I heard. What are the different types of landloans? There's how many different types of landloans are they? I mean, I thought there would just be one landloan. Well, I mean, I like thinking of it as a general term for lots of different scenarios. Right. And so because some people want to buy a lot to build their home on and some people want to buy a thirty five hundred acre ranch. Right. And so that those are both what we would call landloans. And so it's really it's really about what is the intention for this property? And so you may want to buy three thousand acres and build your dream home on. For sure, that's going to require a landloan in some capacity, even if you do a landloan and do a construction loan and a permanent loan on your home. I hear people, I didn't know you could do that. And so really, landloan just means a lot of acres or a lot with no house on it and really everything in between. Some people want to put their property in the name of their business because they operate a business on it. Well, that that's a whole different kind of thing. So it could be commercial in nature. That's true. It's a residential property. Or is it commercial? Yeah. That's that's very important. I'm going to move into talking about construction, which is a whole other beast. But the lot loans, let's say it's a 20 year amortization, so it's a 20 year payment. But do you really don't want it for 20 years? Right. Is there some type of a balloon payment or is it like, could I have my love thing with you for 20 years? I think I think that banks don't like to have it that long, right? That's a depends answer, right? It depends. You know, it may be a five year balloon on a 20 year M and maybe a 10 year and maybe a 20. It really goes back to the intention, because, you know, when you have a bank like a portfolio loan, that loan is being decided on whether it's going to be done or not by a committee of people. And so we're not looking at it. We do have general guidelines, but we're not checking those boxes, OK, here it meets these guidelines. And so this is the loan product. It's it's a conversation. And then, you know, we have standard. This is generally what this looks like. But, yes, it can be a balloon payment in some situations. It can go out for the full 20 years. OK, cool. Yeah. So if people want to get a hold of you, Pinnacle Bank, what's your phone number? And we'll put it down in the notes as well, but 979-224-5360. Awesome. Well, I appreciate you very much. And now stay tuned. We are going to talk right now about construction loans. How do you now you've got the lot. So how do you build on it? So, Jordan, we'll see you soon. Thanks, Jen. OK, bye.