The cost of owning a house has reached new highs in recent years. With that, more young people rely on their family’s support, especially parents, to get a house. One of the ways they’re doing this is by building on their parent’s land. But funding such construction can be dicey. So, can you get a loan to build a house on your parent’s land?
Yes. Construction loans are complex with stringent requirements, so you need to show the lender that your project is viable with minimal risk to be approved. With your parent’s land, you’ll have to add your parent as co-applicant to the loan or first gain legal rights over the land before applying.
Having legal rights over the land is important as whoever owns the land owns the house. Here, we discuss construction loans and how to get construction loans to build on your parent’s house.
What is a Construction Loan?
There are several ways to become a homeowner. You could buy a house or opt to build it yourself. If you already have access to land, the building might be cheaper. But you’ll still need a construction loan for the building. A construction loan isn’t like a regular mortgage. Instead, it’s a short-term loan that the lender releases gradually as the construction progresses. In most cases, you only have to pay the interest during the construction, which helps you keep your initial payments low. But the principal loan balance is still there.
Construction loans usually have variable interest rates higher than the traditional mortgage rates. The lenders will usually ask for 20 – 25% as a downpayment. But you can try using some government programs such as the USDA loans or the Department of Veteran Affairs loans if you’re qualified. This gives you the chance to borrow with zero down payment. After the construction is complete, you’ll have to repay the loan. You can do this by refinancing the construction loan into an actual mortgage or getting a new loan (the end loan).
How To Get Construction Loan
Conventional mortgages are for buying an already existing house. These loans are easy to get once you have a reliable income and good credit. But lenders are usually skeptical about giving loans for new home construction. This is understandable because of the risks involved. Construction is a risky business, and lenders don’t like risks. Regardless, it’s possible to get a construction loan.
In order to get a construction loan, you’ll have to prove that your construction project is low-risk and viable. This usually means giving the lender the timetable and budget for the construction project. The lender will need to see all the construction details. Unless you’re a general contractor yourself, the best way to do this is to work with an experienced builder. The builder will create a blue book that contains all the details of the home building project.
Getting a Construction Loan to Build on Your Parent Land
Construction loans are complex. But when the land isn’t yours but belongs to your parent, it gets more complicated to get the necessary funding. There are creative ways to solve this challenge:
1. Add Your Parent as Joint Applicant to the Loan
The best way to get a loan to build a house on your parent’s land is to apply for the loan with your parent. in this case, you’ll serve as co-applicant on the loan and present your proof of income which should be enough for any lender to give you the loan. When giving a construction loan, the lender generally takes the house as security for the loan. Since the landowner owns anything built on it, your parents legally own the house until they transfer it to you. Thus, the person with title to the land would have to join as a co-applicant for you to get the loan. Lenders are generally open to family members being co-applicants on loan and will be more willing to give the loan under such terms. However, jointly applying for a loan with your parent doesn’t mean the property will become yours. The house built will still legally belong to your parent even though you pay the mortgage. This is because the land can’t be separated from the land, and in case of a default, those with the title to the property will be legally liable.
2. Gaining a Legal Right in the Land Before Applying for a Loan
However, if you don’t want your parent to be co-applicants or wish to have legal ownership of the house, you’ll have to first secure rights in the land. Then you can independently apply for a loan. There are two ways to do this while your parents are still alive. These are:
- Subdivide The Land
In this case, you’ll completely separate your parent’s land from your land, which means there are no overlapping legal rights. Subdividing would make sense if the land is big enough to be divided into smaller lots. But it’ll usually involve a long and complicated process that will cost you money. After subdividing the land and getting the local authority’s approval for it, your parent will have to give you one of the new lots as a gift for you to have exclusive legal rights to it. This means that the particular lot is separate from every other part of the land which still belongs to your parent. Doing this can save both you and your parent’s trouble forever. It means they’re not at risk should you take out a construction on the land and default. The bank can foreclose that property alone without touching all your parent assets. It also means that should anything happen later in the future between you and your parent; they can’t force you out of the house since you have a legal and exclusive right to the property.
- Become A Joint Owner with Your Parent
If you are paying the loan on the property, you can become a joint owner. Joint ownership means an amendment of the property’s title to include your name as one of the landowners. You can use that title to take out a construction loan on the property without including your parents as applicants. But your parents would still be joint owners of the house and any other property on the land. The benefit of this is that you at least have legal rights to the property. But that’s what makes this dicey. With multiple parties having legal rights to the property, the risk of one party’s financial issues affecting the property is high.
Building your home yourself can be fun, but securing funding for the project isn’t. The lenders want to make sure they’re not taking on too much risk, and you’ll have to prove this to them. The risks are greater when using your parent’s land, but you can use legal means to get the funding you need.