Buying Land and Building a House: Pipe Dream or Possible?

It's a popular idea: Buy land out in the country and build your dream house. What are the practical steps, and is it even possible?

It is doable, and plenty of people build homes each year. But many buyers may decide it’s much easier and faster to buy an existing home that meets most of their requirements.

But for the committed, buying land and constructing a custom new home is worth the extra effort. Study the steps and options carefully, then decide if this is the right path for you.

Deciding When You Want to Build

When it comes to buying land to build a house, you have two main choices.

“Either purchase the land and start building right away, or buy the land now and build later,” explains Steven Glick, director of mortgage sales for HomeAbroad. “If you’re ready to build immediately, you can streamline the process with a single loan like a construction-to-permanent loan. Or, you can purchase land now and build later, using a financing option like a land loan, which gives you flexibility.”

Paul Herskovitz, founder and CEO of Discount Lots, says timing is everything in this equation.

“You need to have your timeline locked in if you are buying land today. Do you plan to build immediately, or is this a ‘someday’ plan? That distinction changes everything – from the kind of loan you need to how you evaluate the property,” he suggests.

Raw Land, Unimproved Land, and Improved Land

It’s also important to understand the differences between raw land, unimproved land, and improved land and how these coincide with your different loan choices.

• Raw land refers to property in its original, natural condition with no utilities, roads, or alterations of any kind.

• Unimproved land may offer minimal access, such as a rough roadway, but it still lacks vital services like water, sewer, and electricity.

• Improved land, on the other hand, has been upgraded with infrastructure such as paved streets, utility hookups, and drainage systems, making it suitable or more convenient for building and development.

Buying Land and Building Right Away

Luka Milicevic, a developer with Middle TN Home Alliance in Nashville, notes that if you desire to purchase land and construct a home right away, the land must be truly construction-ready.

“That means it should already have a survey, a site plan, and approved construction plans in place,” he says. “The downside is that existing plans might not match your ideal home, and the seller may charge a premium for having completed the upfront legwork.”

Let’s take a closer look at the different construction loan selections to fund a buy-and-build immediately approach.

Construction-to-Permanent Loan

A construction-to-permanent loan is a single loan that covers your land purchase and home construction and converts to a permanent mortgage after the residence is finished. During the construction phase, you pay interest only on the funds drawn. Once the home is built, the loan rolls into a standard mortgage with fixed or adjustable rates.

These loans are offered by various banks, credit unions, online lenders, and government-backed programs like FHA, VA, or USDA loans if you qualify.

Eligible candidates require a 680 or higher credit score and a 20% down payment (although the FHA may permit 3.5%). Aim for a debt-to-income (DTI) ratio below 43%.

“You’ll also need detailed construction plans, a licensed builder, a builder’s contract, and a solid credit profile,” points out Herskovitz.

The benefit is there’s only one application and one set of closing costs, plus you lock in your mortgage rate upfront, protecting against rate hikes.

“But you’ll likely pay higher interest rates during construction, experience strict lender oversight when it comes to inspections, and possibly need extra funds if costs exceed your loan amount,” cautions Glick.

Construction-Only Loan

A construction-only loan is exactly what it sounds like: a short-term loan used to finance the construction of your forthcoming home. But unlike a traditional mortgage, which is used to purchase a finished residence, a construction loan provides funding typically for 6 to 18 months. It’s mean to supply enough time to build that abode from the ground up.

This loan works like a line of credit, with funds released in stages (called draws) as your builder finishes key milestones, such as the home’s foundation or framing. You’ll pay interest only during the building phase, and you must pay off the loan in full or refinance it into your mortgage once construction is completed.

“In many cases, the lender will finance up to 100% of the construction costs with a construction loan. But rather than providing the full amount upfront, they’ll distribute the loan in installments tied to specific stages of construction,” Milicevic says. “Typically, the builder must front the initial costs for each stage; once the work is completed and inspected, the lender then disperses the corresponding draw to reimburse the builder or pay subcontractors directly.”

Count on having a credit score of at least 680, putting down 20% minimum, having a detailed construction plan, and furnishing a contract with a licensed builder. Your DTI should ideally be under 43%.

“The advantage here is that you can break ground on your home right away. But construction loans tend to have higher interest rates, and you may be required to refinance into a permanent mortgage once your home is built,” says Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College.

Owner-Builder Construction Loan

There’s yet another way to borrow the dollars needed for this project: an owner-builder construction loan. This option is ideal for those who plan to construct the home themselves as the general contractor. Similar to a construction-only loan, the funds are disbursed in draws based on building progress you make. You’re responsible for securing permits, hiring subcontractors, and passing needed inspections.

You’ll also need a credit score north of 700, a 20% to 25% down payment, proof of being a licensed builder in trade or having significant residential construction experience, a detailed construction plan, and a contingency fund for cost overruns.

“Keep in mind that professional contractors are required to carry liability insurance, offer workers compensation, and be bonded, all of which help protect both the builder and lender from financial risk. But when a homeowner acts as the builder without these safeguards in place, the lender assumes a much higher level of risk,” Milicevic adds.

On the plus side, you’ll have full control over the build and reap potential savings on contractor fees.

“However, it’s hard to qualify for this loan, interest rates may be high, delays or errors can derail the project, and lenders may limit draws if they doubt your skills,” warns Glick. “Additionally, these loans are only offered by a few banks or specialty lenders, including some regional credit unions or niche construction lenders.”

End Loan

If you take out a standalone construction loan, you have the option of also getting an end loan. This is a traditional mortgage loan that begins after construction to pay off that construction-only loan. After the home is completed and you receive a certificate of occupancy, you simply apply for a traditional mortgage to cover the final expenses, thereby paying off the construction loan.

Lenders that offer construction loans will usually offer end loans. They’re also provided by plenty of banks, credit unions, and online lenders.

You’ll need a 620 to 680 credit score minimum, a DTI below 43%, and some percentage of a down payment (although a VA loan or USDA loan may come with no money down if you qualify).

On the plus side, an end loan provides flexibility to shop for the best mortgage rates after your home is built.

“The drawback is that you may have to pay more in total closing costs because you’ll have to get two separate loans – one for construction, and one for the finished product,” continues Shirshikov.

Buying Land Now and Building Later

Alternatively, you could choose to purchase land now and build later, which comes with its own set of pluses and minuses.

“With this option, keep in mind that every county – and sometimes each municipality – has different regulations, timelines, and permitting processes, so it can be hard to predict how long it will take to get approvals and begin construction,” cautions Milicevic. “You’ll also need to consider site prep and utilities. As is true with buying land and building right away, understanding your timeline is key because your ability to build depends on far more than just owning the land.”

Here’s a breakdown of different land loans you can explore if you are determined to purchase now but postpone construction.

Raw Land Loan

A raw land loan is designed for undeveloped land with no improvements – in other words, the land will likely have no utilities, sewer, roads, or infrastructure. You’ll borrow funds to purchase the land, then pay monthly principal and interest charges. These loans have shorter terms – often five to 15 years – and are offered by local banks, credit unions, and private lenders.

“Buyers of raw land should be prepared for extensive research, planning, and possibly dealing with zoning or environmental issues before starting construction,” recommends Milicevic.

A credit score of at least 720 and a 35% down payment is typically needed to qualify, as well as a detailed plan for how you expect to use the land. The lender may also require a land appraisal.

“Count on paying higher interest rates – often between 8.5% and 14.5% – making a larger down payment, and setting aside extra resources for utilities and access,” says Glick.

Unimproved Land Loan

This type of loan is used for only partially improved land that has some basic infrastructure but is not fully developed.

“This land may have access to roads or utilities like electricity, but does not yet have water and sewer hookups, for example. It could also be lacking other essential elements like paved roads, sidewalks, or other improvements that would make it fully ready for construction,” says Milicevic.

As with a raw land loan, the funds can be used to purchase the land and the terms can be relatively short. Credit unions, community banks, and regional lenders familiar with local properties are good funding sources. Land sellers are also major resources for unimproved land loans because they know that buyers may find it difficult to get a traditional loan.

Lenders will look for a 700 credit score at minimum, at least a 25% down payment, and details on zoning or land use; they may also require an appraisal or development plan.

Improved Land Loan

This form of financing is intended for improved land that is fully developed and ready for construction, having all the needed infrastructure intact, such as roads, utilities, proper zoning, and permitting.

“Improved land typically requires the least amount of preparation and is ideal for building a home or commercial structure with minimal delay,” Milicevic notes.

Lenders are more likely to green light these loans because there’s less risk involved in the land is easier to develop.

“Terms and interest rates typically are better for improved land loans than raw or unimproved land loans, too,” says Shirshikov.

Still, you’ll need a 700 or greater credit score, at least a 15% to 20% down payment, proof that the land is zoned for residential use, and an appraisal.

“Remember that purchasing improved land is pricier, and you’ll still need a construction loan later, adding to your costs,” cautions Glick.

Land Contracts

Also known as a contract for deed, a land contract is a form of financing between the landowner (seller) and the purchaser.

“The seller finances the purchase of the property directly to the buyer, without involving a bank or other traditional lending institution,” says Milicevic. “The terms can vary greatly, depending on what the seller and buyer negotiate. Typically, the buyer makes regular payments to the seller over a set period, after which the buyer gains full ownership of the land – often once the contract is fulfilled.”

Some sellers accept low credit scores, while others require financial stability. But you’ll likely need a 10% to 20% down payment.

“A land contract is accessible for those who can’t get bank loans, with flexible terms depending on the seller. But it’s risky, with high rates, possible balloon payments at the end, and the possibility of losing your land if the seller defaults on their own mortgage,” Glick says. “That’s why careful legal review by an attorney is a must.”

Buying Land: the Process

Purchasing land involves several key steps. Here’s a rundown, according to the experts:

Define Your Goals

Choose where you want to live, the type of land you want (raw, unimproved, or improved), and your budget. “Get better acquainted with zoning laws, land-use rules, and local restrictions, and set a realistic budget for what you can afford to purchase,” Shirshikov says.

Get Pre-Approved for Financing

Apply for a land loan or construction loan to know what you can afford and show sellers that you’re serious.

Locate the Land

“Work with a land-savvy real estate agent, browse listings, or network locally to find a suitable plot,” says Glick.

Make an Offer

Submit a bid with your agent, including earnest money and contingencies for financing or inspections.

Conduct Due Diligence

“You’ll want to order a title search, environmental assessment, and percolation test for septic systems if needed,” Glick continues.

Secure Financing

Finalize your loan, providing documents like proof of income, land details, and credit history.

Close the Deal

“This means signing the contract, paying closing costs like title insurance and recording fees, and transferring the deed,” Glick says.

The Process of Building a House

Next, it’s good to know what to expect when it comes to constructing the home. Here’s a step-by-step breakdown:

Design the Residence

Work with an architect and/or builder to create plans that fit your budget and meet local codes.

Select a General Contractor

“Shop around for a licensed reputable builder. Carefully check references, past projects, and reviews,” Glick says.

Secure Financing

Apply for a construction, construction-to-permanent, or owner-builder construction loan, submitting plans, bids, and builder contracts.

Gather permits

Your general contractor/builder will likely obtain the needed building, electrical, and plumbing permits as well as any zoning approvals, but it’s your responsibility to make sure these tasks are completed.

Prepare the Site

Clear the land, grade it, and install utilities or a septic system if required.

Begin Construction

Your general contractor will start with the foundation, followed by framing, roofing, and exterior work.

Complete Interior Construction

Your builder will implement major systems like HVAC, plumbing, and electrical, install drywall, flooring, and cabinetry, and add all the other needed interior components.

Pass Inspections

Local authorities/officials will inspect the construction at different stages, such as the foundation phase and framing stage to ensure compliance with codes.

Conduct a Final Walk-Through

Carefully review the completed residence with your general contractor to spot any problems or issues before closing.

Close On the Financing and Take Occupancy

Here, you’ll pay off any short-term loans and convert your construction-to-permanent loan to a mortgage or obtain an end loan, as well as get a certificate of occupancy, and then move into the home.

Pros and Cons of Buying Land to Build a House

Here’s a handy chart of the advantages and disadvantages of purchasing land to construct a home, per Glick.

Other Things to Note

Leigh York, 2025 MLS and data management liaison for the National Association of Realtors, says the best way to ensure a smoother process is to look for a real estate agent who has experience with land purchases and new construction.

“If you have a friend who’s been through this process, they may have worked with someone they liked. Ask them for a referral to a good real estate agent,” York says. “Then, ask the agent candidate several questions about lending options, lenders, and even builder referrals. Most experienced agents will have a general understanding of the financing that local builders prefer or even offer.”

Choosing a location to purchase land is a big decision. Chances are, if you are building a house, you are crafting your forever home. Because of this, you should consider things such as property taxes, insurance, HOA fees, commute to work, school districts, access to utilities, and more.

“Remember, too, that every county, city, and municipality has its own set of codes and zoning regulations that must be followed. It’s crucial to familiarize yourself with these local rules to ensure a smooth building process,” recommends Milicevic.

Additionally, keep in mind that once your home is completed, the property will probably undergo an assessment or reassessment, which could increase your property taxes based on your new home’s value.

The Bottom Line

Building your dream home from the ground up can be an incredibly rewarding journey. It’s your chance to create the ideal dwelling for your family and lifestyle, one that caters to your long-term plans. Yes, this route to ownership is more complex than purchasing an existing residence. But with careful planning, guidance from experts you trust, and the right financing options, this dream is more than achievable.