Buying a lot where a house burned down
September 1, 2019 11:21 AM   Subscribe

What kind of loan do I get for a lot in my neighborhood where a house burned down?

About five years ago a house in my neighborhood burned down. The house was demolished but the utilities, driveway, and detached garage are still present. They just put it up for sale and we want to buy it and build a house there.

The sequence needs to be:
1. Buy new lot
2. Sell current house (moving into an apartment for duration)
3. Build new house

... so the loan I need now is just for the lot, not the lot plus new house.

What kind of loan do I get for this purchase? "Home loan" lenders like Rocket Mortgage are saying they won't lend because it isn't a house, ok fair enough. But the other category seems to be "unimproved land", like I'm chopping a homestead out of the forest with a hatchet. This is a regular lot in a regular neighborhood that used to have a house and will have a house in the future.

posted by BeeDo to Home & Garden (10 answers total) 4 users marked this as a favorite
Were you planning to self finance the build? If not you need a builders loan. The bank approves you for the value of lot plus the cost of the house you plan to build. But they only release funds for the initial purchase. And then they release additional funds as your reach building milestones to pay your building contractor(s). Once the house is complete you convert it over to a regular home mortgage.

Otherwise just unimproved land mortgage. The requirements in my jurisdiction are harder for this kind of loan verses a home loan (like you need to put 25% down, you can't get government insurance, etc.). So unimproved land loans are basically for everything that can't be classed as a home loan.
posted by Mitheral at 11:32 AM on September 1, 2019 [3 favorites]

They're called "construction loans" or "builder's loans"; they often come with a set of requirements around permits, inspections, insured & bonded contractors and so on, all of which are a good idea anyway. You don't want end up with the same smoking hole in the ground you started with.

Ah, Mitheral has it already; jinx.
posted by mhoye at 11:35 AM on September 1, 2019

Thanks for the replies. I guess the easiest way forward would be to pull the money from my current home via re-finance and then pay cash for the land. Then I get a construction loan for the house once I have that in order. Any reasons that is a terrible idea?
posted by BeeDo at 11:49 AM on September 1, 2019

The re-fi will count against you when you apply for the construction loan (it's money you owe to somebody who's in line before the construction lender). You'll want to get everything sorted out and agreed before you take the land money out of your current equity. After you're on the hook for that money, the lenders have you over a barrel.
posted by spacewrench at 12:03 PM on September 1, 2019

I think this is a situation where it would really pay off to talk up a actual human banker or mortgage broker in your city/state. They have lots more products available than the online lenders, who are very “one size fits all.”
posted by mskyle at 12:37 PM on September 1, 2019 [5 favorites]

Maybe some reasons that it might be a terrible idea.

It's too soon. You don't show any awareness of how pivotal the approval of your local municipality is to getting a permit to build and getting insurance after it's built. You're aware that it costs a lot of money, and while that's a necessary prerequisite, it's not sufficient. If you do not have a healthy fear, or at least knowledge of your local municipality, you should.

Speaking of money, do you know how much it costs to build a house in your neighborhood, roughly, in terms hecto-dollars per square foot? Does that jibe with your expectations of how much you can get for your current house, or how big a house you want to build?

Head down to your zoning department or local government, and find out if there are any restrictions or other hurdles that you would have to jump in order to obtain a permit to build there. A fire changes things, especially if there were a lot of them in the area. Are there any liens on the property? What was the nature of the house that was there before? Was it an "existing non-compliant structure"? Was the house that was there before built with permits?

Between the time the previous house was built and how, the awareness of hazards has certainly increased. Flood zones have expanded. Earthquake rupture zones have been mapped. Regional surveying problems have come to light. Infrastructure has been maxed out, and requirements for updates imposed.

In my neighborhood, the costs of inadequacies of the local infrastructure (say the size of your cul-de-sac turnaround bulb is too small for a firetruck to use), whether those inadequacies are a result of actual underbuilding or the increase in standards over time, are often visited on the home builder or home remodeller. You need to know about this up-front.
posted by the Real Dan at 12:40 PM on September 1, 2019 [7 favorites]

Thanks all. Looks like we have a few ways to go forward.
posted by BeeDo at 1:24 PM on September 1, 2019

Strongly suggest you talk to a local credit union about their recommendation for how to proceed. Someone in the mortgage department will have experience and current knowledge about your options and local market. They’ll even likely have a checklist for stuff mentioned by the Real Dan.
posted by stoneweaver at 5:14 PM on September 1, 2019 [2 favorites]

to add to what Real Dan said, the energy codes are changing Jan. 1 - just having insulation between studs/rafters will no longer be enough. You will have to have continuous insulation on the outside of the walls and roof.
I'm an Architect but we do as little residential as possible, so I can't guesstimate what that is going to do to prices.
Don't know where you are but in the Southeast US, we are seeing residential around $250/ square foot for middling grade houses.
posted by rudd135 at 7:24 PM on September 1, 2019 [2 favorites]

So I have bought a lot and built a home. Everyone above has made good points. Here, the way most people do this is they work with a home builder. If you are working with someone who builds plenty of homes, they can sometimes buy the lot, and then you either just get a construction loan, which includes the value of the land OR you just buy the completed house from them. That is simpler than buying the land yourself. Most of my friends who have built homes went this route. But you have to work with a home builder that builds enough homes and can afford to do that.

The main reason I mention this is that in my view, finding someone to build the home is a crucial part of the process. I would be talking with anyone you know who has used builders in the area, etc. This will be a crucial step in the process.
posted by bove at 9:12 AM on September 2, 2019 [1 favorite]

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