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Building vs. Buying: A Guide to Land & Construction Loans

Building vs. Buying: A Guide to Land & Construction Loans

Northern Virginia real estate markets tend to be hot. With our region’s proximity to jobs in the D.C. metro area, buying a house here is often expensive—and competitive. The median listing price is $499,000 in Fauquier County and $417,000 in Prince William County. Zillow characterizes both market temperatures as “Very Hot.” No wonder, with an average cost range of $200,000-$560,000 in Virginia, building a new home is an attractive alternative to buying. You can get everything you want in your home and it may not even be more expensive than buying an existing house. Of course, you may also wish to buy an existing house that is older, smaller, and/or in bad shape and use a construction loan to rebuild your dream home on the lot.

Whatever your reasons for considering building vs. buying, we’ll break down the pros and cons and share everything you need to know about land and construction loans in this article.

Pros & Cons of Building a House

While building your dream home offers many exciting possibilities, it can also be a demanding process that isn’t for everyone. Let’s look at the pros and cons of using home construction loans to create your new space.

Pros of Building a House

  • Customizable: You can get exactly what you want (within your price range) in terms of layout, size, materials, finishes, etc.
  • Up to code: A new home will be built to meet the most current building codes.
  • Energy-efficient: Overall, new homes will usually be more energy-efficient than older homes with drafty windows and old heating systems. However, you can also make specific choices for greater energy efficiency during the design and construction process.
  • Nontoxic materials: You won’t have to worry about discovering toxic materials such as lead paint or asbestos in your home.
  • Brand new condition: You won’t have to worry about large repairs any time in the near future.

Customizing every detail of your homes layout, size, and finishes is an advantage of building a new home that you won’t get with buying an existing home.

Cons of Building a House

  • Longer process: When you make an offer on an existing home, you can usually close and move in within 30-45 days. On the other hand, the new home construction process takes about seven months from start to finish. You’ll need another place to live while your new home is being built.
  • May require land prep: Depending on whether you buy “raw” or improved land, the construction crew may need to prep the lot before getting started by clearing trees, moving rocks, and more.
  • Delays and budget overages: Unfortunately, anyone who’s watched HGTV knows that construction projects of all sizes can hit unexpected snags along the way, taking longer than expected and/or costing more than originally planned.
  • Takes time and participation: A very involved, and time-consuming process – plotting the land, creating floor plans and blueprints, choosing materials, selecting finishes/hardware/paint, etc.

How Do Land Loans Work?

If you already own the land on which to build your home, you can skip this section. If not, you’ll need to purchase a land lot and, if you can’t pay cash, you’ll need financing.

First, look for a real estate agent with specific land purchase experience. Knowing the right price for a land lot can be tricky—and it’s very local. An experienced agent will help guide you through the process and make sure you get a fair price on your lot purchase.

Next, talk to a local lender. Community banks like TFB are often more willing to provide land lot financing because of our local expertise and commitment to Northern Virginia. Local lenders know the real estate market and can provide an accurate assessment of your land lot’s value.

Once you find land financing, you can expect the process to include a review of your credit history and income, an assessment of the lot, and a loan closing day. Land loans are usually term loans, meaning you’ll repay the loan over a pre-determined length of time in regular monthly installments. Once construction is finished on your new home, you may be able to roll your land loan into the permanent mortgage for your house.

Talk to a local lender when seeking land financing – they have expert knowledge of the local real estate market and land values.

How Do Construction Loans Work?

Home building loans are a type of short-term financing to cover the costs of construction until your new home is finished and has been granted a certificate of occupancy. The maximum term is usually up to one year. Interest rates are usually variable, meaning they can adjust up or down throughout the term. To make the process more affordable, you can make interest-only payments during construction. Afterward, you can convert your construction loan into a permanent mortgage.

Construction Loan Tips
  • Look for a construction-to-permanent loan, which offers just one closing instead of paying closing costs twice.
  • Expect your construction loan to pay for some or all of the following: land, architect and builder plans, permits and fees, labor and materials, closing costs, contingency reserves in case the project costs more than initially estimated, and interest reserves if you don’t want to make interest payments during building.
  • Usually, down payment requirements will be 20-30 percent of the total loan amount. Certain loan options may be available with a lower down payment.

What Are the Costs of Building A House?​

Consider the following as you decide between building and buying:

  • Land Cost
  • Builder’s Cost (is there an extra fee if you don’t choose one of their plans?)
  • Construction Cost (materials and labor)
  • Finishes (flooring, cabinets, fixtures, etc.)
  • Utilities (do they need to be installed?) such as water, sewer or septic, heat, electric, and/or gas.
  • Landscaping costs (planting grass, trees, shrubbery, and putting in walkways and patios)

Using a Construction-to-Permanent Loan on a new build will simplify the closing process.

What Are the Home Loan Options for New Construction?

We’ve mentioned construction-to-permanent already, but here’s what you need to know about it, as well as other construction financing options:

  • Construction to permanent mortgage (C2P): Starts as a draw loan and automatically converts to a traditional mortgage loan after construction is complete. Also known as a “single-close” construction loan. Best with a straightforward construction plan and for borrowers who want a predictable interest rate.
  • Stand-alone construction loan: Only covers the cost of construction. You will also have to apply for a conventional mortgage to pay off the remaining balance on your construction loan. Also known as a “two-close” construction loan. The downside to this option is that you end up with two closings and have to pay closing costs twice. Best for borrowers with large cash reserves who may want to use a different lender for each type of financing.
  • Federal Housing Administration (FHA) construction loan: Offers a single-close loan with a lower down payment requirement. Good for borrowers with a less-than-excellent credit score.
  • Renovation Construction Loan: If you want to purchase an existing home in need of major renovations, you can finance the cost of improvements into your mortgage based on the expected home value after renovation is complete. Best for borrowers who want to put their own stamp on a fixer-upper but don’t have cash for renovations.

Homebuyers of fixer-uppers who don’t have cash on hand for improvements would benefit from a Renovation Construction Loan.

What Are the Types of Home Builds?

  • Manufactured Home: If you’re looking for a more affordable new home option, manufactured homes are built in a factory and delivered to your land lot in one piece. Manufactured homes also have the advantage of being portable—you can move your new home to a different location if you wish.
  • Modular Home: This new home option is also constructed in advance, but delivered to your site in pieces. Modular homes are assembled on a permanent foundation, so they are not portable.
  • Site-Build Home: This is the most customizable and also the most expensive new home construction option. Also known as a stick-built house, site-builds are constructed from the ground up on a permanent foundation in your land lot.

10 Questions To Ask Yourself About New Construction

  1. How much can I afford to spend on new home construction?
  2. Is every item on my wish list an absolute must? What items or materials am I willing to compromise on?
  3. Where will I live during the home construction process?
  4. Will the style of my new home and its final value be in line with the existing neighborhood? Answering yes to this question could make a future resale easier.
  5. Are my credit score and debt-to-income ratio strong enough to get approved for a construction loan?
  6. If you are buying new construction through a development, is the land cost included in the base pricing?
  7. What warranties come with my new home and how long do they last?
  8. What process will I go through to correct any post-inspection issues?
  9. Is the location of your land lot convenient to nearby amenities such as schools, shopping, and medical facilities?
  10. Will you have to pay HOA fees?

Land and Construction financing can help make building your dream home in Northern Virginia a reality with the help of TFB’s local mortgage lenders.

Contact a TFB Mortgage Lender Today!

Our Northern Virginia mortgage lenders can help you find the best land, construction, and mortgage financing to meet your needs. Learn more about Land and Construction Loans, contact us, or apply online today!