My parents are giving us an acre of land free and clear to build our house on.
How can this benefit us in acquiring a loan or any other benefit?
Anonymous
You have nice parents.
It used to be that having your land Free & Clear (Jargon for “paid for”) was as good as a construction loan approval. Not so anymore I‘m afraid.
Some mortgage lenders have gone back to being so conservative (afraid) that they consider gifted real estate equivalent to you gambling in Las Vegas with some one else’s money…you don’t really care if you lose because you don’t really have any “skin in the game”.
But, some mortgage lenders will still consider that gift as an asset that lowers their risk in making you a loan.
Your mission, should you decide to accept it, is to find the construction mortgage lender who will consider that gift not only as an asset, but as all or part of your down payment.
Are they out there? Yes, but it now takes perseverance and a bit of luck to find one…exactly like it did when I started in the home building business.
Of course I hope it goes without saying that today any borrower must have good, even stellar credit, sufficient income, etc. to get any loan.
Most mortgage lenders, in today’s market, do not consider land value in their construction lending ratios.
They will only lend a percentage, usually 75% of the cost of the home building project, or a percentage, usually 75% of the “Appraised Value, WHICHEVER IS LESS!
Let me give you a best case-worst case scenario.
In both cases, the bank’s appraisal states that the land is worth $50,000, cost of construction is $150,000 and the finished house plus the land will be worth $200,000.
Your best case: Bank will lend 75% of value or $150,000, utilizing your land as the down payment.
Your worst case: Bank will only lend 75% of the actual cost of $150,000 or $112,500, requiring a down payment from you of $37,500. The land is omitted from the equation since it cost you nothing.
If you live in one of the states that NORMANDY CORPORATION lends in, you may have lucked out as they will lend up to 90% of the “Appraised Value”, which therefore should include the current value of your “gifted” land.
You should also visit small local banks, credit unions, and mortgage brokers. They may be more likely to help you.
Good luck,
Carl