Financing Your Forever Home

What’s the best way to finance a newly constructed house that will become your forever home?

Q: I’ve been reading your book 100 Questions Every First Time Homebuyer Should Ask. As my wife and I approach retirement age around two years from now, we’re wondering if we’ll ever be able to retire.

I’m a certified organic grower. A piece of property near us has come up for sale. The buyer is in a land contract. He has had trouble making payments to the seller. The seller asked us if we’d be willing to buy it from him. In addition to the land, there is also a house located on the property that can be lived in.

We’re thinking we would buy out of the land contract, tear down the existing home and build a new one for us. We could pay cash for the land but would need financing to build the home. My wife knows little about real estate and doesn’t think we need a real estate attorney to help us out. What do you think?

What Mortgage Can I Get Approved For?

A: It’s an interesting plan, with a few caveats.

First, the smarter move is to get financing for the purchase of the land, even though you can pay cash. It’s easier to get financing to buy a property with a home on it than to finance vacant land or farmland. However, if your option is to simply take over the land contract, and the seller has offered excellent terms, you may not want to take out a mortgage at today’s interest rates, if they are higher.

Typically, however, the cheapest money you’ll find will be when you purchase the home and get financing at that time. If you have enough cash saved up, you can then use that cash to build the home you want. Just make sure you have enough cash. When people build their own homes, they almost always underestimate how much it will cost and how long it will take.

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Here’s another important consideration: Can you afford to live in your current home and qualify to buy the new property with a mortgage? If you own your current home outright, without a mortgage, you should be able to qualify, even though you are nearing retirement age. On the other hand, if you’re renting, that shouldn’t factor into the equation. If you own, you can sell or rent your current home once your new forever home is ready, providing another stream of retirement income.

Regardless, we think you need a real estate attorney to complete this deal successfully. Here’s why: You’re doing this on your own without a broker. You’ll need someone to draft the contract to purchase the land and home from the seller. You’ve already mentioned that the seller has a buyer paying for the land. When the seller cancels that contract with the buyer, you’ll want to make sure that when you buy the property, it’s a clean purchase. You don’t want to get involved with any problems the first buyer had in purchasing the land over time. Or, subject to any liens that may exist. You’ll need to make sure you get good title to the land without any issues relating to the prior buyer.

Loan Payment Due?

Of course, we recommend that you purchase an owner’s title insurance policy for the property. This will protect you in case title issues pop up. The title company would be responsible to fix any title problems that come up that were not noted on the title commitment that you receive and review prior to closing.

No matter where you live, it helps to have an attorney review these documents. They can make sure the seller is providing you with whatever information is required by the local municipality, county, state or federal government. Real estate attorneys have the experience to understand what issues come up. They know what to look for in a title commitment. They can also help you understand any risks involved in the purchase.

Given that you want to tear down the existing home on the property in the future, you’ll need to understand how that might work with your insurance carrier and the lender that gave you the loan. When you take out a loan to purchase a home, the lender doesn’t expect you to turn around and tear it down.

Buying Your Forever Home

When you get ready to move forward with building your new home, you may need to have your lender approve what you’re doing. You don’t want to find yourself in a position where the lender discovers you tore down the house and calls the loan.

Let’s say you get through all that. Building a new home means hiring an architect and a builder, especially if it’s a forever home. Without an experienced real estate attorney to help guide discussions, you’ll miss things. The contract with the builder will likely be one-sided. That can cause significant problems down the line.

Also, you’ll need to know what zoning laws say. What restrictions there are on what you can build your forever home. Is the property in a flood zone area? There may be other municipal, wetland, zoning or other issues you’ll need to consider. For example, if the ground is soft and requires additional support, you might decide not to build a home when you find out that the foundation required will be unaffordable.

The time to find out this crucial information is before you close on the home. Finally, you’ll want to make sure the deeds are filed correctly. The attorney you use should have extensive experience in building new homes. They should also have experience helping people buy and sell homes and land in your area.

Think through all of these details carefully. Choose seasoned professionals to help you get where you want to go. If you do that, you should have smooth sailing. Let us know how it goes.