Homescratch Homestead, Step 2: Financing

Reader Contribution by Lyndsay Dawson Mynatt
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Financing options are highly personalized and circumstantially specific. Once we discovered our property using the treasure mapping tool (read Part 1), we didn’t have the cash flow to cover both the cost of the property and the build. Conventional mortgage loans are not available without an existing house on the property, so we had to seek other options for available loans. Below is a synopsis of options that we found within our search parameters. 

Lender Land Loans

Land loans are riskier for lenders than mortgage loans. The value of raw land is less than the value of a house and historically more owners default on payment. In a foreclosure, there is no guarantee that the bank will receive the money back for the cost of the land. Due to the high risk, any lender who is willing to grant a land loan will require up to a 25% down payment with a higher interest rate and a maximum timeline of 5 years to pay the outstanding amount due, known as the balloon payment. 

Many banks, including our local bank, will not touch this type of loan due to the inherent risk, but we found that People’s Bank offers both lot loans and contruction loans.With People’s Bank, we had 2 options:

1. Take out a lot loan and keep our cash to build. 

2. Purchase the property and take out an owner/builder construction loan. 

Option 1: Finance the lot and keep our cash to build

Pros: This would allow for the most flexibility with the building process, eliminating the bank’s timeline for the build. Also, the fixed budget creates financial accountability to build within the cash that we have. 

Cons: Cash is fixed. If the budget is not realistic, then the building process could flounder. With the 3-year balloon payment due, there is limited time to finish the build and refinance into a conventional mortgage. 

Option 2: Purchase the property and take out an owner/builder construction loan*

Pros: The land is yours, and the deed can be handed over. 

Cons: Zero cash is left and this option would put us at the mercy of the bank. The bank has stakes in the completion of your property, so they have a significant measure of control for the timing and amount of the cash withdrawals, required inspections and the full building schedule.  If the house is not completed in the 12-month time period, there are steep fees. Living in an area with an extreme winter made this option less appealing or realistic. 

*Note: the owner/builder construction loan requires proof that you are a licensed contractor or will be working with a licensed contractor for the project. 

Initially we thought we would just purchase the land and get a loan for the build. After meeting with a lending agent, we realized that we needed to keep our cash and develop the property within our own schedule. Since we are not subbing out any of the work (except for state required plumbing and electric), we needed more freedom within this process as we both have other job commitments. 

Now that we had found property and had researched our options for financing, it was time to close the deal with our realtor. Once we presented our findings, he presented yet a 3rd option—seller financing. 

Seller Financing

In our case, the owners of the property were an investment group and interested in financing the property in lieu of the bank. Suggesting owner/seller financing was a genius move from our realtor, as it put us in a better position for negotiation. The sellers would be willing to take our lower offer since they would be regaining interest on our payments for the next three years. Not only did that decrease the overall cost of the land, it eliminated close to $9,000 of bank fees for the loan initiation, approval and refinancing process. The risk and requirements for us is the same. We paid a 25% down payment, the lenders met the bank’s interest rate of 5.5% and we agreed upon a balloon payment of 3 years with no penalty for early payoff. If we default on the payment by September 2020, legally the land continues to belong to the owners. 

At this point we are almost two years into the process. Originally I thought we should be able to pay off the lot within two years. Thankfully our realtor is savvy and guided us on the right path. If everything progresses as planned, we will be able to refinance our property by next spring, pay off our lot and roll into a conventional mortgage within the three-year timeline.

Lyndsay Dawson Mynatt is a dedicated forager, outdoor enthusiast, and blogger for MOTHER EARTH NEWS. Her published articles include:Build a DIY Cider Press in the 2015 September/October issue of GRIT and 5-Minute, 5-Ingredient Mayonnaisein the 2015 Best of MOTHER EARTH NEWS. Follow her adventures at A Faithful Journey, and read all of Lyndsay’s MOTHER EARTH NEWS posts here.

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