Combined Land and Construction Loans Explained
The traditional pattern for many folks’ rural land and building construction efforts is simple: buy the land first and at some point later build the home or commercial structure. This pattern works well for some folks, but other folks already have building plans and designs in mind and they have no need to wait until a later date for construction. Many lending institutions are not comfortable with combined land and construction loans, and some require considerable efforts on the part of a borrower even if the institution is willing to do a combined loan, especially in rural areas. Still there are always options, and a good option for borrowers who need a combined land and construction loan is First South Farm Credit.
First Step – Find a Lender
“Many commercial lenders/mortgage companies do not feel comfortable financing land and/or construction in rural areas,” says Taylor Hart, manager of the Auburn/Opelika Branch of First South Farm Credit. “If a commercial bank will do construction loans in rural areas they often will require the owner to survey out a smaller parcel for the home site which leads to added costs and time for survey and recording at the courthouse. This ‘subdividing’ can also cause the project further delays if the county requires it to go before the subdivision committee.”
“First South has been financing rural America for over 100 years. We can do construction loans in rural areas on any size property and do not require a smaller tract to be surveyed out saving time and money. Keeping the loan ‘in house’ also helps with streamlining the process,” he explained.
What’s the Loan Process for Approval?
A potential builder/land purchaser will need to follow First South’s specific process for obtaining a combined loan for land to build a house which is designed to protect both lender and borrower.
“We would need plans, specifications, and an executed contract from a licensed builder to be able to have an appraiser arrive at an appropriate appraised value. We can typically lend up to 85% of the appraised value of the total package of land and home,” Hart explained..
“Barndominiums -some sort of combination of living quarters with a barn look- have become really popular lately and most commercial lenders are not comfortable with this type of construction. As a rural lender First South can provide construction loans on these as well. Most of our construction type loans are dealing with either homes, barns, or poultry houses (which would be commercial, and have their own different set of criteria),” he said.
So How are Combined Land and Construction Loans Set Up?
Most land and home construction loans made by First South follow more or less standard patterns. There are several options on setting up these loans.
“We are able to do construction loans for up to 12 months, interest only if that is what the member wants. We then do a permanent longer term loan. We also have a program we offer that is done with one closing still consisting of a construction period followed up with the longer term mortgage. This is popular as rates are rising due to the fact we can get the rate and term locked down now instead of the end of construction,” Hart pointed out. “This process takes the risk of rising interest rates during construction out of the equation. First South likes to sit down with our members and tailor the loan to what fits where they are in life and what is comfortable for them. My suggestion is to call the First South office in your area to discuss options. We can lend with terms up to 30 years”.
Is a Combined Loan Right for Everyone?
When asked if there are folks who might not find a combined land and construction loan a good fit, Hart said that at the time of the land purchase, most people are not ready for a construction loan.
“After securing the property then they begin the house planning process. In this situation we may end up with a land loan and a construction loan or mortgage. Based on what is best for the member, we can leave them separate or combine the two loans into one,” he added.
A Little Payback Never Hurts
For those potential borrowers who might not be familiar with First South, “First South is a co-op owned by our borrowers. As such, we pay a patronage refund back to our borrower/members once a year. Does your mortgage company pay you money back,” he asked.
For potential borrowers who want to learn more about First South and its combined land and construction loans, a call to 1-800-955-1722 should get a potential borrower in touch with the First South Farm Credit office in their area.