Ellis Custom Homes, serving the Smith Mountain Lake area. Building trust one home at a time!

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    Hardy, VA

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A shell can be a great option for those wanting to build a custom home, who are able to take on responsibility for some of the interior work. This can reduce the initial cost considerably and allow the home to move towards completion on your own timeline. Many individuals have skills themselves or access to friends and family who do. A shell can also allow you more freedom with the interior design features of your home. The biggest challenge is financing. While obtaining it for a shell home is not impossible, it can be more difficult, with the requirements varying from lender to lender. Read on to learn more.

What areas of the home are typically included in a shell?

A shell home typically includes everything needed to build a free-standing, weather-proof structure protected from the elements.

Items typically included in a shell home:

Earthwork: the hole for the foundation and the grading around the house for proper drainage and to make way for a walk-out basement, if part of the design.

Footers and Foundation: the pouring of the footers and the foundation, as well as any drains and rough-in plumbing

Framing: all of the home’s framing, including any support structures such as floor joists and roof trusses, as well as floor assemblies, subflooring, exterior and interior walls, and stairways. Your builder can also provide plumbing and electrical rough-ins.

Flues and Chimneys: any flues or chimneys that are part of the plans are constructed.

Doors and Windows: any exterior doors and windows, including the garage doors.

Exterior finish: the exterior is finished with the chosen material such as siding or brick, including the underlayment and sheathing underneath it.

Roof: the framing of the roof, the underlayment and shingles or metal.

All the items above are what is necessary to create the weather-proof shell, which can then be finished.

What is not included in a shell?

Typically a shell will not include any plumbing, electrical or interior finish work. This is where you take over, purchasing your own materials and completing the home yourself.

Plumbing and electrical: depending on whether you elected to have the builder rough these in or not, the work may be extensive, or confined to simply installing items such as outlets and ceiling boxes for lights, installing the light fixtures and light switches, and selecting and installing the sinks, toilets and vanities.

Fixtures: the home will come without any interior fixtures, including outlet covers, light switches, light fixtures, and ceiling fans, giving you the freedom to choose exactly what you want.

Interior finish work: the shell will need drywall, including mudding and painting it, as well as the finish carpentry work such as installing baseboard, door and window casings, crown moldings and other trim.

Flooring: the home will have all floor assemblies and subflooring as part of the shell, but will need the finished flooring such as carpet, hardwood, laminate, or tile.

Kitchens and bathrooms: depending on your agreement with the builder, the plumbing can be roughed in for these, but the other necessary items such as tile showers, tub/shower inserts, toilets, vanities, sinks, and cabinetry would need to be purchased and installed.

HVAC: shell homes do not typically come with the HVAC system installed.

Most builders are willing to take on shell projects and are typically quite flexible with the items you want to be completed, although they will likely want to complete the shell before allowing you or your own contractors, or friends and family, to begin the work that comes next. This is because the builder, as the general contractor, could be held liable for anything that happens while the job site is considered theirs.

Can a shell home be financed?

Most people who choose the shell route are financing the project themselves with cash. This allows them the freedom to complete the home themselves, no questions asked, as long as all work has been permitted and completed according to the local building codes.

For those who need financing, they’ll likely face increased scrutiny from their prospective lender. The lender will want to see a well-detailed plan and a comprehensive list of construction details and building materials. You’ll need to convince the underwriters that the project is realistic and that you have the ability to complete it. If you have your own land, using it as collateral may help the bank with its decision. Some financial institutions do offer loans for self-builds, but their availability and their requirements vary greatly from one lender to the next.

Is a shell right for you?

In certain scenarios, a shell build can be a great option, particularly when financing is not necessary and you’re able to maintain your primary residence while finishing construction. The builder can do the heavy lifting for you and then hand off the project for you to complete. This gives you the freedom to really customize the interior, sometimes save money, and have the chance to take ownership in the process of helping build your own home. 

At Ellis Homes, we have built shells for a number of customers. If this is how you’d like to make your new home a reality, we can work with you to make it happen. Please reach out anytime for more information.

Building and financing a new custom home can be confusing even under the best economic conditions. Throw in rising rates, labor shortages and sustained supply chain challenges and the task not only grows in difficulty, but in cost. Thankfully, there are things you can do to both help ensure a smooth process as well as help keep the project’s cost as economical as possible.

I. Selecting the right building lot

Selecting the right building lot can have a major effect on cost, and we’re not referring to the purchase price, which will be predominantly determined by location. Here we’re going to focus on lot improvements and the costs associated with the concrete needed for your foundation. Lot improvements are items such as clearing trees and putting in a driveway, a well and septic, or running lines and tap fees for connecting to public utilities. Costs for each of these items vary greatly depending on the specific conditions of the building lot you choose.

Type of septic system: does the lot perc for a standard, gravity-fed septic system or will it require something more expensive and engineered?

Distance from main road: does it have an access road or driveway already cut in? Will it need cleared? How far will the home be from public utilities such as power lines or public water and sewer, if offered? What will be the cost for the necessary lines and piping? Also, for public water and sewer, what are the fees for tapping into them?

Slope of the lot: how steep is the lot and will it require additional concrete for the foundation? Is it too flat requiring additional earth work for grading or to make way for a walk-out basement? And in that case, will a retaining wall be necessary?

Geology: this can be more challenging to figure out, but is the area known for rock? If there are other new homes nearby built recently, did they have any issues when preparing the lot?

II. Design and build

When it comes to the home itself, there are several design aspects that can drive up costs. There are also a few ways, by planning ahead, to reduce costs at the time of building, while still making the home amenable for future changes.

Two-story homes versus ranches: two of the most expensive aspects of a new build are the roof and the foundation, and ranch homes typically have about twice as much of these items as a similarly sized two-story. If stairs are not a factor for you, then the better economics of a two-story home may make sense. Many plans even offer first-floor master suites.

The home’s depth: it’s not something most people think of, but the depth of the home can be a considerable driver of cost. Homes that are less than 32 ft deep, can use standard floor joists and minimal beams. As the depth grows beyond that, not only are additional costly beams necessary, but frequently these homes require engineered floor joists known as a TGI or Truss Joist I-Joist. These can add considerable cost.

Roof lines and gables: plans with multiple roof lines, steep pitches and large numbers of gables may offer some enhanced aesthetics, but it comes at a price. More complicated roofs can increase the cost of the build dramatically, especially when multiple gables are part of the design.

Porches: everyone loves a nice porch and the tranquility they offer, but they are not an inexpensive aspect of building a home. Large porches are not only costly, but appraisers frequently assign a value to them that is less than the cost to build them. If you’re not concerned about the appraisal, then this may be of less importance, but if you need the house to appraise for what you’re paying to have it built, then being conservative with porches is a smart avenue.

Build for the now, plan for the future: if you’re currently facing budget constraints, consider adding things such as a garage later on. Or planning now for a future addition. For example, your builder can frame in a doorway ahead of time and then cover it up with drywall, until the moment comes to begin the work in the future. Talk with your builder about things that can be done to make future improvements and additions easier.

Use one of your builder’s stock plans: with just about any builder, it will be more economical to start with one of their stock plans and make your customizations from there. With their own plans, builders have a very clear idea of the exact build cost, even with considerable design changes. This allows them to offer you a more competitive price when compared to something completely custom that they’ve never built before and could easily cost more than they anticipate. To account for that risk, they’ll need to price in a larger margin, which can translate to a higher build cost.

III. Financing

If you’re planning on financing your construction project with a bank, there are a few things you can do to try to reduce costs, especially if you’re using the normal construction-to-permanent loan, which is a construction loan that converts into a permanent mortgage once the build is completed. Though none may result in a dramatic savings, taken together with some of the other cost-reducing measures described above, they can contribute to keeping the project within your budget.

Use your land as a down payment: if you own your own land or have built up equity in land that was previously financed, you can use this as part or all of the down payment for your construction loan, reducing the amount of out of pocket cash necessary. One caution with this is in today’s market – late spring 2022 – valuations of land and homes are in flux and that value of that land today, could easily be more or less, in the 10 – 12 months it will take to complete your home. If it’s more, that’s great! But if it’s less, it could reduce the dollar amount of your down payment from your land.

Buy points upfront: depending on your financial institution, they may offer you the ability to buy points on your future mortgage. Generally, this means paying 1% of the mortgage up front for a .25% drop in your rate. This can both reduce your monthly payment as well as the amount of interest you pay over the course of your mortgage. For individuals who plan to stay in their home for a longer period of time with no plans to refinance, this may make good financial sense. If this interests you, ask your loan officer to help you figure out the breakeven point, which is the number of payments you would need to make for the savings to equal the upfront cost.

Negotiate closing costs: sometimes, though not always, there is some room for negotiation on some of the costs the bank charges to close on the loan, such as the points they charge for origination. It’s always worth a shot, and getting estimates on closing costs from various lenders, can be a big help in this process. As the number of mortgage applications continues to drop, banks may be more willing to make concessions to earn your business.

Understand the potential fees: this one is more for prevention of unexpected costs. Although the global supply chain has recovered to a degree, it still has a long way to go to reach the efficiency and reliability of the pre-pandemic days. In addition, workers in all facets of home construction remain in very short supply. This simply means that homes are taking longer to build. If financing your home, your lender will typically provide you a one-year lock on your future mortgage’s rate. If construction takes longer than that, most lenders will allow you to extend that rate lock for a fee. Speak with your lender in the beginning about what that cost would be, as it can vary significantly from one lender to the other.

Having a custom home built is a dream for many people, and if it’s in your plans, we hope the above tips can help. At Ellis Homes, we’re always willing to answer any questions and provide as much guidance as we can to help prepare you for the journey and ensure it’s as smooth as possible. Please reach out to us at any time for more information or to learn more.  

Choosing the right building lot is one of the most important aspects of building a custom home and is something that can have a significant effect on your budget. This article will go over some of the key considerations for selecting a lot, some of the major risks and ways to mitigate them.

Consideration 1: The Lot’s Slope

An ideal lot has a gradual downward slope, from front to back. This level and direction of slope has several advantages. It allows for the easiest drainage of water away from the home, while also making it easy to incorporate a walk-out basement. Insufficient drainage can lead to water pooling, which can result in problems with a host of items including with the home’s footers and foundation, its basement, as well as walkways and landscaping.

Steep lots

Lots that are steep in slope create different issues than those that are flat. Steep lots, such as those frequently found around Smith Mountain Lake, can significantly increase foundation and excavation costs by requiring additional earth work and concrete. Depending on the steepness of the lot, there can also be additional cost for concrete pump trucks, as standard concrete trucks may not be able to get close enough to pour the footers directly. Steep lots frequently have narrow access to the site. This can sometimes limit the ability for multiple contractors to access the lot at same time, which can increase build time.

Flat lots

Flat lots typically carry higher excavation costs as they may require significant grading work to ensure water runs adequately away from the house. Additionally, if the walk-out basement is desired, a significant amount more of earth will need to be removed to make it possible.

Consideration 2: Well & Septic / Sewer & Water

The home’s waste disposal system and its water are critical aspects. If the lot is closer to a larger population area it may have access to public water and sewer. If it is out further, or simply in an area without public services, it will require a well and septic.

Well & Septic

Wells are less frequently an issue than septic systems, and it can be difficult to verify water availability prior to actually drilling the well. The more critical concern is the septic, and to be able to build a home on any lot, it must pass a percolation or perc test, which measures the water absorption rate of soil. If the soil does not perc, then you may have considerable difficulty building a house on the lot, if one can be built at all. We advise anyone considering the purchase of a lot to make their offer contingent on the soil passing a perc test for a standard gravity-fed septic system. This is important as a building lot may perc but for an engineered system. Standard septic systems currently cost around $8,000, whereas engineered systems can run upwards of $25,000 or more – a considerable increase in cost.

Water & Sewer

Building lots near cities or towns frequently have public access to water and sewer. In this scenario, the homeowner is responsible for running any water and sewer lines from their home to the nearest point of connection into the public systems. There are also hook-up fees charged, which vary greatly from one county and town to the next. Typically connecting into public water and sewer costs less than having to install a well and septic. Exceptions to this rule are when the distance to the nearest public line is considerable. In this case, as long as the lot percs for a septic system, installing a septic system may be a less costly option.

Whether it’s a well and septic or public water and sewer, the key thing is to understand as much as possible the associated costs for these items before purchasing any lot.

Consideration 3: Lot Restrictions & Restrictive Covenants

If you are considering purchasing a lot in any development or neighborhood with an association, it is absolutely critical to carefully review any lot restrictions or restrictive covenants that are in place. It is not uncommon for items to be required that limit the look and style of a house, or that require specific materials or features that may significantly increase cost or again change the look of the custom home you envision. We cannot stress enough the important of having a firm understanding of the association, its covenants and its approach to new construction. This can prevent a lot of problematic surprises down the road.

For people interested in building around Smith Mountain Lake, the maze of associations and their covenants can be a challenge to navigate. Having built many homes there, Ellis can frequently offer first-hand knowledge that can be useful in evaluating a potential lake lot.

Protect yourself from headaches

Many builders, including Ellis, are willing to inspect a lot that a customer may be seriously considering purchasing, and advise them on potential building challenges. In fact, it’s not uncommon for prospective buyers to even make their offers contingent upon their builder’s favorable review of the lot. Obviously, the builder can only give you their opinion based on their experience in the area and on what they can see above the surface, but their inspection can significantly lower your risk of issues.

October 11, 2021 – The truth is there is unlikely to be a better time than now, anytime soon. Even the most conservative economists agree that due to continued supply chain disruptions and high-demand for materials, the cost of building a new home is likely to continue to climb. The saving grace today is that mortgage rates for the time being remain historically low.

So what is driving this increase? Are builders really making out? On the surface the high prices may give the appearance that builders must be raking it in. As much as we wish it were true, we are feeling it as much as you the customer, and the pandemic has been an exceedingly challenging time for us. This year we have experienced unexpected double and triple-digit price increases on many of our materials including lumber, heat pumps, garage doors, ductwork, plumbing and electrical, as well as general material shortages.

With all of this crazy inflation and increased cost, why build now? As already mentioned, prices for building materials are likely to continue to rise, with many experts predicting them not returning to pre-pandemic levels prior to interest rates going up, and that is if prices ever return to what they were before. The Fed has already strongly indicated that rates will start to be ramped up early in 2022. The Mortgage Bankers Association (an industry group) recently predicted that 30-year mortgage rates could climb above 4% next year. If interest rates climb from 3.0% to 4.0%, your payment on a $300,000 home will increase by $167/mo.

In a moment like this, why choose Ellis Homes? In such an uncertain time, selecting a large, established, reputable builder such as us, can help you hedge much of the financial risk involved. Unlike smaller, more independent builders, we have the financial stability, volume and supplier relationships to weather unexpected price increases and material shortages, completing our homes as agreed, with minimal effects on our customers. And that helps those we build for rest a lot easier!

We also have the design and building experience to help our customers get into a new home as cost-effectively as possible, and can help you with the right choices to stretch your budget as far it can be stretched. We try as hard as we can to get everyone who walks through our doors into a new home within their budget. In today’s reality, it’s not always possible, but our promise to is that we’ll work harder than anyone else to try to make it happen.

Please don’t hesitate to reach out to us anytime with questions or to schedule a free consultation.

Did you know that there are actually three parts that make up the final cost of a custom home? This is something new to many customers when they start the journey, so we’re going to break it down for you here.

Many consider the cost of the home construction and the cost or value of their lot as factors, but there is actually one more key variable, and that is the cost in getting your lot ready to build on. This is also known for short as the “site prep“.

Site prep is figured separately from the price of the new home because those costs are highly variable and are almost 100% determined by characteristics of your specific lot, independent of the style home you choose to have constructed.

Site prep includes the following, among other items:

Basically site prep is everything required to be able to build the house on your lot, and these costs can vary from as little as $10,000-$15,000 to as much as $40,000, in total.  Additionally, it’s important to know that there are several different ways that builders charge for these costs.

If you’re building on a lot owned by the builder, these costs should be included  in the price of the home.  The builder most likely calculated them before he even purchased the property, knowing they’d be selling the lot as a package with everything included.

If you own or are purchasing your lot, as most of our customers are, there are three ways to account for the cost. 

Method 1 – Standard allowance

The most common method  is to give standard allowances for everything on the lot. This doesn’t require the builder to visit the site or obtain bids for all the work.  Of course, if your allowance is $15,000 and the cost turns out to be $30,000, you’re on the hook for the difference. 

Method 2 – Included in home price as a service

Another common way is for the builder to get the estimates, add his normal profit and overhead and include it in the final price of the home.  There’s certainly less risk for you that way, but now you’re paying several thousand dollars on top of the cost, if he includes his markup. There will also still be a clause that you have to pay the additional cost if say for example, they hit rock or have to go deeper for the well.  That’s fair since the builder can’t know those things for sure, but you’re still paying that additional profit of several thousand dollars for their management of this work.

Method 3 – Our Method

There are a few builders like us that will go out to lots you’re considering purchasing, and inspect and evaluate them with you. We’ll also obtain exact bids for all the work that will need done. If you choose to build your new home with us, we will include these items in the final contract price, at cost, without any markup, and you’ll see the same invoices that we do.

Of course, as unforeseen circumstances can occur with lot work, we do include a clause, as do all builders, that you’re responsible for any unforeseeable costs. But again you pay only cost for any work done, with zero markup by us, and of course we and the professional we work with evaluate the lot as thoroughly as we can to help lower the risk of surprises beneath the surface.  We feel our way is the fairest  for the customer.

Have questions on typical costs? Click here to get in touch.

We can provide you with an actual dollar for dollar detailed breakdown of what these typical site prep costs are and how much to they normally run. Just send us a note on our response page and we’ll send out a complete realistic breakdown.

Have a lot and are interested in a lot inspection? Just contact us via our contact page or give us ring at 540-912-0112 . There is no obligation, and we’ll out  take a look at your lot or one you’re considering buying, at no cost to you

It’s our most frequently asked question, and usually one we receive even before we sit down with a new customer: What is your price per square foot?

The hard fact is it’s not universal, and if one builder quotes you $100/SF and the next quotes $150/SF, you’re not one bit closer to determining which one is going to build you a better home or which one is a better value. There are dozens of factors that go into that price, and even the calculation method used to determine a home’s square footage varies among custom home builders. But the most basic difference, everything else being equal, is which style of home you choose to build. With the same specifications, the same amenities and the same finishes, certain styles of homes will always cost more than others.

The “hierarchy of home prices” is as follows, from highest to lowest and I’ll explain why.

  1. Single-story Ranch (most costly per square foot)
  2. Story and a half / Cape-style home
  3. Two-story home (most economical per square foot)

There is a simple explanation for the difference between a single story and two-story custom home. If you have a 2,000 square foot ranch home, you then have 2,000 square feet of roof and 2,000 square feet of basement. Whereas the same size two-story has half as much basement and half as much roof, so the two story will always be less per square foot of finished area. It’s important to remember that we’re talking finished square feet because in total area the ranch, if you finish the basement, potentially has 4,000 total square feet while the two story has a maximum of 3000 square feet (1,000 per floor).

Fifty years ago the Cape Cod was very economical per square foot because the builder just finished the attic area already built under the roof. But in today’s world the cape costs nearly the same as the ranch. The difference is that half of century ago labor was very inexpensive. Not so today. Because of that, most other style homes are built with a main roof structure that is engineered and constructed off site. These are the giant triangles, called roof trusses, that you can see on many modern homes if you take a peak under the roof. The framing crew simply has to set them up in place and then nail their sheathing on, usually in less than a day for a straight roof. The advantage of this, other than lower cost, is that the trusses are constructed in a controlled environment free of moisture and protected from the elements.

Capes on the other hand are usually built by hand with 2 x 12 rafters, on the site. Material cost for 2 x 12 rafters vs. 2 x 4 trusses is much higher, but the big difference is the labor cost to “stick frame” an entire roof. That additional labor and material brings the cost for capes right up there with ranches.

All of this is very important to consider in choosing your new home, especially if you’re a family that needs more square footage at a lower cost. Though for most customers, the decision on what style of new home to build won’t be determined simply by square foot cost. After all, you’re custom building a home because you have your own idea of what style you want and exactly what you want in it. And as you begin that journey, it’s important to keep in mind that price per square foot alone isn’t going to serve as a very good guide in comparing home building costs. It can still be useful, but you’ll need to dig a bit deeper to understand what that cost represents with any specific builder and consider how each style of home affects it.

In plain English, how does construction financing really work?

When clients come into our offices they have all kinds of ideas on how construction financing works.  Construction loans, permanent loans and single-closing construction-perm loans are all possible options. And while they all work the same during home construction, they vary greatly at the beginning and the end.

First, let’s see how they are the same.

With any type of construction loan, your payments during the building of your home are fairly small.  That is because they’re not based on how much you’ve borrowed, but just on how much the bank has paid out up to that point.  For example, let’s say you own your land and the cost of building your new home is $200,000.  When you close on your loan, you haven’t really borrowed any money, it’s just been made available.  Your builder is paid in instalments or “draws”, based on the amount of work that’s been done on your home at each stage.  For the first “draw”, usually banks will pay the builder 10% at the loan closing, or 15% when the foundation is finished.  Thus for your first payment 30 days later, you’ll be paying the interest on only a small percentage of the total loan – just on the amount that so far the bank has actually paid out to your builder.  

For instance, in the above example if your builder is given a draw of $20,000 at closing, then one month into construction you would have a payment of about $83, or 30 days interest on the $20,000.  Of course as construction goes on, and the money drawn out increases, likewise your payments also increase. This is why it is so crucial that construction remains on schedule – not just for your family, but for your finances as well.

Now, let’s take a look at how they’re different.

The biggest difference between the types of loans available is in the closing costs, legal fees and other costs associated with the bank process and the recording of your loan.  For example, if you have a construction loan and a permanent mortgage, which is typical, you’ll have two sets of closing costs.  Individually each set is not usually as high as those of a standard mortgage – so you won’t be paying double -, but the total of both together will be somewhat higher.  

A few Virginia banks have started offering single-closing construction-perm loans, which have been standard in other states for a number of years. With this type of loan, you only have one closing, at the beginning of construction.  When the home is complete, the loan simply “modifies’ into your permanent mortgage, thus saving you the second set of closing costs.  The closing costs will almost always be higher than for a construction loan, but rarely as much as the total of the two closing costs of the two-loan method discussed above. 

Depending on your individual circumstances one method or the other may be better for you.  

If you’d like more information on how each loan-type works, on the financing process in general, or some unbiased feedback on what specific area banks offer, please give us a call or contact us.

Often, by the time clients receive our brochure, they have already found a plan they’ve fallen in love with.  Whether it’s something they found online, something they’ve had drawn, or a plan they’ve created themselves, we can usually figure a cost to build the home on their property.  For a custom builder, pricing that home is a costly, time consuming process.  It’s very common for clients to tell us that they’ve gone to other builders, but never received any final pricing.  There can be a few reasons – the builder may be booked up for the year, the plan may be more complicated than they want to take on, but it’s usually just that it’s going to take them too much time to price.  Here are a few tips that will help you get better results when looking for custom home pricing.

Finally, if you’re understanding the complexity of what the builder has to do – estimating all the pieces and parts that go into a plan, estimating the cost of labor to put all those pieces together and estimating cost increases over 8 months – you’re going to have varying, sometimes widely, prices.  Because a builder happens to be the highest price on your home doesn’t mean he’s a “high priced builder”.  His estimating on your plans may have just come out higher (or everyone else is low) because none of them have built the plan before and none know the cost for sure.   So a word of warning, prices will always vary regardless of overhead or profit margins because everyone is estimating.  If you have two estimates at $275,000 and one at $225,000, STEER CLEAR! Of the fifteen to twenty homes we build each year at least three are for customers who had a contract with a builder and it never got started (after a long period of time and a lot of money paid to the bank) because the builder realized he couldn’t build it for the price he quoted.  Last year was out of the ordinary.  We had six, nearly a third of our customers, who came from another builder who didn’t deliver.  My best advice, which I give at all First-time Homebuyers Seminars that I do for builders in Virginia, is that price is undoubtedly important, but reputation is the only thing you can count on. Unfortunately, it’s impossible to compare apples with apples because there are a hundred places for a builder to reduce cost that you’ll never, ever know to ask about.  Ask for references from recent customers, check reviews, talk to local banks to see if they’ve had issues.  In short, do your homework to find out if the builder has a reputation for delivering on time and on budget.  You would do it before you buy a car, do it before you make the biggest investment of your life.

If you would like to talk with one of our highly experienced building consultants about finding the right lot and a free site inspection, building your new home or how financing works, please give us a call in Lynchburg at 434-266-1070 or Smith Mountain Lake at 540-912-0112.

With regard to land, our customers tend to fall into one of three categories: those that already own property, those that that have purchased property but are still paying on it and finally those that are planning to purchase property as part of their entire custom home package. The financing is structured the same way in all cases, but the initial steps differ slightly. In all land situations, you will need at a minimum a “Construction Agreement” with your builder, detailing pricing, specifications, terms and plans in order to apply for financing. A lender will not accept a mortgage application without this agreement as it’s a key component in determining the final value of the property and loan.

All construction financing is based on the total value of the house, site preparation (well, septic, excavation, etc.) and the land. The difference is simply in how much the value of the land counts as down payment (or as the bank looks at it, how it affects the LTV or loan to value).

Let’s just look at the three scenarios separately.

Scenario 1: Owning your land outright
In the cases of owning your land, or partially owning your land, you can often finance even your loan closing costs out of the equity in your property, allowing you to build with no money out of pocket. If you already own your property outright, the bank will still do exactly the same appraisal process. They’ll take your home plans out to your property and the appraiser will estimate the value of the entire property when the house has been built. In that scenario, if the appraiser feels the entire property will be worth $200,000 when completed, and you need $160,000 to build, then it is an 80% LTV. Your land is the same as cash to the bank so you have 20% down.

Scenario 2: Land purchased but not yet owned outright
In a similar scenario, the appraiser says the property will be worth $200,000 when it’s completed, but you still owe $10,000 on the land. In that case you’ll need to borrow the $160,000 to build plus the $10,000 to pay off the land, a total of $170,000, which would then be an 85% loan to value, or 15% down. Still a very good loan for you and the bank.

Scenario 3: Buying the property & the home at once
Buying the property and building the home in the same mortgage? The process is the same, but you would have to bring your normal down payment to the closing. The property is still appraised with the new home on it – let’s stick with the $200,000 figure. In that case the maximum you could borrow would be 97%, so you would need at least $6000 plus your loan closing costs.