From Raw Land to Dream Home: Residential Land Loans on Hawai’i Island

This spotlight series features some of the loan experts at Element Mortgage, our preferred lender. 

If you’re anything like me, you’ve dreamed of building a modest home on several acres of land in Hawai’i, complete with a tropical fruit orchard and your very own coffee plants. It seems like a comfortable and rewarding lifestyle, doesn’t it? 

Home searchers often pass over this option as it seems unattainable or too complicated, however, that couldn’t be further from the truth! Once you understand the residential land loan process on the Big Island of Hawai’i, you can begin the journey of finding raw land and building your dream home here. 

The Lowest Median Land Prices

Of all the Hawaiian Islands, the island of Hawai’i has the lowest median land price, in part because of its sheer size. At 4,028 square miles, Hawai’i Island represents nearly 63% of the state’s total land mass. In fact, all of the other Hawaiian Islands could fit into the Big Island and there would still be quite a bit of room to spare. 

Hawai’i Island’s significantly lower median land price can also be attributed to the risks associated with volcanic eruptions. Unlike the other Hawaiian islands, which haven’t had an active eruption in over 200 years, the Big Island has active eruptions that necessitate lava zone classifications. 

The island is split into nine lava zones based on historical and geological evidence of past eruptions. The least expensive land on Hawai’i Island is often found in Lava Zone 1 and Lava Zone 2, since the most recent eruptions have occurred in these two zones. 

Insurance Prices

Insurance prices are highest in Zone 1 and get progressively lower from Zone 2 to Zone 9. Unfortunately, not every insurance carrier will cover land or homes in Zones 1 and 2,  due to the increased risk of hazard in these zones. 

It’s important to note that insurance carriers that do cover land or homes in these areas will each have their own specific set of guidelines that must be met. At the time this article was published, there continues to be a moratorium on insurance covering the course of construction in zip code 96778, which includes the town of Pāhoa.  

Short-Term Land Loans

Luckily, financing is readily available for borrowers who want to purchase land and build their dream home in Lava Zone 3 through Zone 9. Typically, land loans financed on Hawai’i Island are subject to one, two, or three-year fixed or adjustable-rate loan terms.  

Short-term loans such as these are intended to enable borrowers to purchase the plot of land, while giving them sufficient time to financially prepare for and establish construction plans. Unlike standard construction loans, which require that the borrower pay for construction costs right away, these short-term loans allow the borrower to control their expenses by not paying for construction costs immediately. 

When it comes to land loans on Hawai’i Island, it is critical to understand that you must have a plan in place to build a residence on the property within a selected time frame. Without a permanent structure, there is no collateral for the lender to seize in the event that the borrower defaults on their payments. As such, interest rates on short-term land loans will be higher than they would be on a standard home mortgage loan.  

Your Journey Begins Here

Ready to begin your journey from searching for raw land to building your dream home on the Big Island? 

First, you will need a good credit score, at least two years of employment in the same position or industry, proof of sufficient income to repay the loan, and enough assets to cover the down payment and closing costs of the land. The minimum down payment typically starts at 25% to 30%. Financing, however, is normally not available on any subject properties designated Conservation or Preservation zones.  

If you have already located a few potential lots that you are interested in, then your next step is to contact me, your local land lender, to ensure that you are fully qualified to take on a land loan. You will then be paired up with a real estate agent who will offer valuable insight on the property and its zoning requirements. Once you’ve been pre-approved for the land loan, we will hit the ground running to get your journey to that Big Island dream property underway! 

Your Residential Land Loan Team

Land in Lava Zones 1 and 2 has a lot to offer! For more information on Hawai’i Island real estate and residential land loans, please contact me. I’m a mortgage consultant at Element Mortgage, Hawai’i Life’s preferred lender, and I’m here to help!

With Aloha,

John Stengel