Oran Hall | Buying land to build dream home
Published:Sunday | May 10, 2020 | 12:24 AM
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: I looked through The Gleaner and saw a response you gave to a question. I realise that most of the housing developments around are superexpensive, so my wife and I are thinking of purchasing land to build our dream home. I want to ask: If you were in my shoes, how would you go ahead to get financing to make the above-described scenario possible?
– Obrein
FINANCIAL ADVISER: There are several types of financial institutions that provide mortgage financing, and all require prospective borrowers to, most of all, meet the affordability criteria that they set. For your part, being able to build your dream house is a function of how much it will cost and whether you are able to afford it.
Building societies are the private sector financial institutions that focus primarily on mortgage financing, but commercial banks, credit unions, and life insurance companies also provide it. That is one option.
A very big supplier of mortgage financing is the National Housing Trust (NHT), which, on its own, provides financing, but it also does so through its joint mortgage facility with other mortgage-lending institutions.
It is not clear exactly what you have in mind. Do you want financing to purchase land and to build your dream house, or do you plan to use your own funds to buy the land and then borrow to build? In any case, you would need to have some savings, the more the better, as it would reduce the amount you will need to borrow.
Let us say you do have funds to start you on your mission. It seems to me that you could identify suitable land at a location where you want to live. It would not do any harm to buy it for cash and focus on borrowed funds for construction. If you are thinking of borrowing to buy land and then to build, it seems that you could have a pretty steep climb.
If you and your wife are NHT contributors, the best course would be to borrow from it, and if need be, to borrow the rest from one of the other mortgage-lending institutions. It is possible to access the NHT’s joint mortgage facility through one of the participating lending institutions, thereby simplifying the application process.
However you take it, you would have to establish that you are financially prepared for the mission of building your dream house. You should be able to establish that you have a steady income from employment and at a level that can support the monthly mortgage payments. You should also be able to meet any legal and other expenses you are likely to incur.
Let me suggest that you engage the NHT. If you choose to buy land with your own funds, you may access its Build On Own Land facility, which is available to qualified contributors who have never received a loan from it. If it will cost more to construct the house than the amount you can borrow from the NHT, then you must use your own funds to cover the difference before it pays the sum you are borrowing, and you can also use the joint mortgage facility. The maximum sum joint applicants can borrow is $13 million.
The NHT also has a Construction Funds Loan facility for contributors who have previously secured a House Lot Loan or an NHT Serviced Lot Loan. The sum you could borrow would be the difference between the Non-Homeowner’s Loan limit and the sum borrowed to purchase the land. If, for instance, you and your wife were eligible to borrow $13 million, taking your age and income into consideration, and you had previously borrowed $4 million dollars to buy land using the above facilities, you would qualify to borrow $9 million.
Similar to the Build On Own Land facility, if it costs more to construct the house than the amount you can borrow from the NHT, then you must use your own funds to cover the difference before the NHT makes its first disbursement, and you can also use the joint mortgage facility.
The limit on the open-market house lot loan per contributor is $2.5 million, that is, $5 million for joint applicants. The NHT provides 100% financing through its Serviced-Lot Loan. A serviced lot comes with basic infrastructure such as paved roads, water supply, and electricity.
Will you get your dream house on the first attempt? Maybe not, but you could make what you can afford now, and over time, make the enhancements to make the dream a reality.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.