People are always trying to find additional ways to reduce their costs when buying a home. Maybe that means buying a lower price point or changing to a condominium instead of a single-family house. Another segment of the market in most people’s home search journey considers the possibility of buying a piece of land and putting a home on it. The question is, does it make sense?

Whether it makes sense to buy a piece of land and put a home on it boils down to the two different types of financing instruments: cash or debt. You’re going to buy the house in cash and in full, or you’re going to debt service it by taking out mortgage financing. Let’s start with cash. If you buy a piece of land in cash, you have virtually no obstacles other than the permitting process with the city or the county in which the property is located. As well as the construction costs and the costs of the actual dwelling itself. Cash for this type of situation would be both the quickest and the easiest. Debt servicing, otherwise known as mortgage loan financing, is another factor. To be clear mortgage loan financing is the most simple, streamlined, and easy to acquire for a stick-built single-family house that is already built on a permanent foundation. Or, a manufactured home that has already been attached to a permanent foundation that is fixed to the land.  Those two different types of collateral are far easier than buying a piece of land and putting a home on it.

If you’re looking to purchase land and put a home on it, you’re not looking for a traditional mortgage loan, you’re looking for a land loan. The land is typically the collateral in this situation since there’s no dwelling attached to the property yet. Mortgage companies typically require excellent credit, owner occupancy, and about 40% as a down payment. So, they require a substantial amount of cash. Then there’s additional financing that you would need to secure to obtain a manufactured or a prefabricated home to fix it to the land. This narrows your mortgage loan options even further. There are some banks, and some lenders out there, that will allow you to use mortgage financing to acquire the land and put a manufactured home on the property. Construction financing, however, the interest rate that you’re going to pay for a product, is extraordinarily expensive. 6% to 7% interest rate is not uncommon for that type of financing. If you compare that to a traditional stick-built single-family home, financing for a property that already has a dwelling attached to it is around 3%. The costs associated with securing this type of financing are on top of needing an extraordinarily large down payment and paying a substantially higher market rate. This is all going to mean incurring additional loan fees probably in the form of discount points. The reason why this type of financing is so expensive is that it’s inherently risky for the lender to grant you financing for something that is not stable. If it goes south, it’s going to be hard for them to recoup their losses.

This is just the cost associated with this type of financing. Additionally, you must wear two hats. The hat of the borrower and the hat of the project manager. As we know various industries, particularly the construction industry, and building materials are experiencing shortages right now. Demand is up and scarcity is upon us. This also means that this project might take a little while longer and can add more logistics challenges to the project. Above higher loan costs, more down payment, managing a timeline in terms of construction logistics, and the list goes on. It doesn’t mean don’t do. It does mean that you need to be fully invested and need to have a substantial amount of cash on hand to be able to do this. On the flip side if you were to take these goals and rechanneled them into a single-family house that’s already built and enacted; you might be much better off in terms of loan costs, lower down payment, lower industry, and lower cost of funds.

“But wait, it’s such a good deal! I can get a low-cost manufactured home or factored home for $50,000 and it’s such a good opportunity for the land.” In the beginning, psychologically, it looks like it’s a better deal. Lower cost for the land, lower cost for the structure if you factor in the down payment. The higher loan fees and interest rate as we’ve mentioned, the construction and permitting process, and the timeline associated with getting the project complete. It’s generally not going to be less expensive than traditional stick-built single-family financing that you can get for a property that’s already built or a manufactured home that’s already permanently fixed to a foundation. Look at it like this, if it was that cheaper at the end of the day, why isn’t everybody else doing it?

If you’re looking for practical and affordable mortgage loan financing work with a local lender and experience. Someone who can walk you through the various intricacies of what your project entails so you can decide what makes the most financial sense for you and your family; Start with a no-cost loan quote today!