Home Equity And 401 Loans
Finally, if you have sufficient equity in your home, you might consider borrowing against it to pay for your land purchase. The advantages here are clear. Home equity loans are fairly easy to obtain . Home equity lines of credit also carry fairly low interest rates, and very favorable repayment terms. Depending on the cost of the land you are planning to purchase, this can be an ideal solution.
Using the assets in your 401 to buy land may be an option, but only if your employer is willing to allow you to borrow money from the company’s retirement plan. There is no law requiring employers to allow employees to borrow from their existing 401, so this option may not be available to everyone. It’s worth noting, however, that even if you are authorized to borrow against your 401 you will only have access to a limited short term loan. Depending on the cost of the land you want to purchase, this may or may not be sufficient. Having said that, borrowing against your retirement savings can be a lower cost alternative to traditional financing.
Land loans are typically more difficult to obtain than other secured loans, but any challenges to your loan application can be overcome if you have a definite plan in place to improve the land and increase its value as an investment opportunity for your lender.
Usda Construction Loan Eligibility
Mushlin and Duncan point out that several rules are attached to USDA construction loans.
Eligibility requirements include:
- Most lenders require a 640 minimum credit score
- You must not have experienced bankruptcy in the last two years
- You cannot exceed USDA income limits based on your areas median income and the size of your family. The USDA Rural Development program is intended to help moderate- and low-income families purchase and build homes
- The property must be located in a USDA-approved area
- You must receive a new construction warranty from the builder
- Any remaining funds after construction ends must be applied directly toward your loan principal
- The USDA must approve of your chosen contractors, who are required to have needed licensure, liability insurance, and a minimum of two years experience building homes
Your lender will also look for 12 to 24 months of clean, unblemished credit, no gaps in your income, no mortgage forbearance, and no late or missing rent payments.
Basically, you want to have the cleanest credit, income, and debt ratio possible to get this loan, suggests Mushlin.
In addition, the new home must be your primary residence, meaning youll live there full-time. And the types of homes eligible to be built are limited to single-family homes, manufactured homes, and eligible condominiums.
What You Should Know
- Land financing sources include land loans, construction mortgages, agricultural loans, second mortgages, and seller financing
- Raw land can require a down payment of as high as 50%, with high interest rates for raw land loans from private lenders
- Construction mortgages provide funding for purchasing the land and building a home on the land
- Second mortgages, such as a HELOC or home equity loan, allow homeowners to use their home equity to purchase land at a low interest rate
- The government assists farmers in purchasing land through the Canadian Agricultural Loans Act Program
- Seller financing lets you skip the banks and make payments directly to the seller in exchange for the land title once the land is fully paid off
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The Local Bank Advantage
Whether or not youre already signed up with a community bank or , they should be the first lender you try on your quest for a land loan. Unlike a national bank or loan company, community banks know your town and its real estate values. Theyre also more motivated to contribute to growth and development on the local level. Therefore, they are usually more willing to take a risk on lending you money to buy land.
Difference Between Vacant Land Loans And Construction Loans
A construction loan, or builder loan, is a type of home loan where the funds are drawn down as your property is being built in progress payments. The main difference between a construction loan and a vacant land loan is the timeframe to build the property. During the time of taking out a construction loan, the lender will usually set a maximum time limit for you to completely draw down on your loan for when construction is completed. Whereas you are not obligated to build on your vacant land once taking out a vacant land loan.
Another difference between these two home loan types is a construction loan will involve determining the full amount of funds you will receive to purchase the land and build your home, whereas a land loan will only involve the funds needed to purchase the land.
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Making An Offer On A Plot Of Land
Making an offer on land isnt that different than making an offer on a home. When youre ready to purchase a piece of land, youll have to make a written offer. Youll approach the seller with the terms youre willing to abide by along with all of the details related to the transaction.
After you make your initial offer, dont forget that you can negotiate the land price down. Its best to come prepared with research and data, though, to back up whatever price youre willing to pay. You can even ask the seller to pay some of your closing costs and include contingencies such as a clause that states you can walk away from the deal if the land fails to pass inspection.
Alternative Options To Financing Land
Though there are a few different options for financing a land purchase, you dont necessarily have to go one of those routes. There are also a few financing alternatives that you may find more ideal than a traditional land loan. Before pursuing one of these options, however, its important to carefully weigh the risks.
- Home equity loan or line of credit: If you already own property thats appreciated in value since you purchased it, you may be able to leverage the equity to buy additional land using a home equity line of credit or home equity loan. You wont have to make a down payment, but this can be a particularly risky option because you could lose your home if you default on the loan.
- Personal loan: Another option is to take out a personal loan, which can be used for just about anything. You may want to consider this option if the loan amount is on the smaller side and/or the land is in a condition that would make it tough to qualify for a traditional land loan. Just keep in mind that because the loan is unsecured, the interest rates can be as high as 30% .
- Buy a teardown: One workaround to securing an actual mortgage loan for a land purchase is buying a property that you plan to tear down and rebuild. Of course, this option is not without its own potential costs and roadblocks. Youll need to secure permission from your lender and the appropriate permits, as well as pay for demolition.
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Finding Land For Your Mobile Home
There are quite a few ways to go about searching for land for a manufactured home. Firstly, you know where you want to live, at least approximately. Maybe you hinge your decision on a school district, distance from work, or simply a part of the city or county that makes you feel at home.
On MHVillage, you can browse mobile homes for sale with land by city, county, or zip throughout the nation. If youre interested in exploring, below are a handful of markets in different regions with available home and land listings.
Another efficient way to search available open land is to reference the area MLS. You may be able to browse listings of property acquired and cleared by the county, through a housing authority or county land bank.
You can hire a realtor, as well. Or, perhaps youve already started your home search. In that case, the owner or sales representative at your preferred manufactured home dealership or retailer can be a great resource on how to choose land for a mobile home. Topics your sales professional can cover might include the type of land you have in mind, existing infrastructure and added site prep that may be required. But dont forget the old school approach to finding land for a manufactured home! Drive the area. Take your time, appreciate the neighborhoods or rural attributes youre considering. Look for open parcels and land-for-sale signs.
Loans For Buying Land
We all know about home loans, which we take to either buy an already constructed or under-construction house/apartment, or to construct a house on a plot of land we already own. However, not many of us know about loans for purchasing land. Land loans or plot loans are available both to individuals looking to construct a house on a plot at a later date, and to investors and real estate developers. However, if you are buying a plot to construct a house on it, you cannot keep the land undeveloped for a long time, as banks have certain restrictions on by when construction should begin on the plot.
Land loans can be taken to finance the purchase of a vacant plot. However, these loans might be given only for residential land and not commercial or agricultural land. The loan-to-value ratio would be lower in this kind of loan, and other terms and conditions are also likely to be stricter. Let us look at 4 prominent land loans available in the Indian market to get a clearer picture.
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Benefits Of A Usda Construction Loan
Brandon Mushlin with BuildBuyRefi.com explains that a USDA construction loan makes it easy for an eligible borrower to acquire land, have a new home built, and finance that finished home over up to 30 years all in one simple loan.
You only have to pay for closing costs once, since a single closing is involved, and only one qualification and one appraisal are required.
You can either find land to place under contract, use current land you already own, or use land deeded over to you from family to combine with your chosen and approved builder to construct your home, he says.
According to USDA, funds can be used to build and purchase single-family homes, including eligible condos and manufactured homes.
The loan amount covers:
- Landscaping costs
- Other authorized items
Like other loans backed by the U.S. Department of Agriculture, the USDA construction loan offers up to 100 percent financing. That means qualifying borrowers dont have to make a down payment.
In addition, you arent obligated to make payments while the home is being constructed.
Do Your Homework Before You Make An Offer
So youve figured out what kind of land you need and found the plot of your dreams. This is where the process starts to get involved. You can collect this information yourself or hire a real estate agent or attorney to help you. Just make sure the person you choose has experience with land brokerage.
Heres a checklist of things you need to know before you make an offer:
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Pros And Cons Of Land Loans
Land loans allow borrowers to purchase land without having to pay 100% of the cost out of pocket. This gives homebuyers and businesses more flexibility in where they choose to build. But choosing to purchase land comes with a whole new set of challenges that you wont have when you buy a pre-existing building.
What Is A Land Loan
A land loan is used to finance the purchase of a plot of land. Theyre used when a buyer is interested in buying a piece of land to build a home or utilize for business purposes. If youre interested in obtaining a land loan, the type you take out will depend on where youre buying land and how you intend to use the land.
The three most common types of land loans are raw land loans, unimproved land loans, and improved land loans.
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The Us Department Of Agriculture
The USDA provides land loans to borrowers who plan to build a primary residence in a rural area. If you plan to build the property yourself, apply for a Section 523 loan through the USDA. The interest rate on these loans is just 3%. Or if you want to hire a contractor to build it for you, apply for a Section 524 loan, which charges interest based on the current market. Its possible to qualify for no down payment, but you must repay the loan within two years.
What Type Of Loan Is Needed To Purchase Land
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Financing a land purchase requires a lender that understands how land sales work and is willing to take on the risk. Several loan options are available depending on your credit, income and assets. Other factors that affect obtaining a loan include the type of land you are buying and whether development plans already exist.
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Types Of Land Loans And Interest Rates
Basically you can buy raw land or vacant lots with “residential lending” up to 160 acres’ with a “collateral loan” at Bank Prime Rate plus something, say Prime + 2%.
If your land purchase is bundled with a construction mortgage, you can likely get a less expensive amortizing mortgage at normal discounted mortgage rates.
If your home will ultimately be an acreage home, then acreage lending rules will eventually prevail.
If you intend to but a mobile/manufactured home, then manufactured home lending rules will also apply.
If you are intending to have a lake or cottage property, check here for those lending rules.
Same for your future construction plans, as construction mortgage rules will apply.
When all else fails, and your property is just not getting bank lender’s attention, there is always the world of private lending.
As mentioned, beyond 160 acres, your requirements are likely commercial development or agricultural in nature, and require loans specific to those purposes and related risks.
In all cases, a borrower needs to understand what it generally takes to get a mortgage. If you are unsure if you can, that should be your first step.
How Do Usda Construction Loans Work
Most often, construction loans require that borrowers take out two separate loans. First, they borrow a construction loan to finance the build. Once the construction is complete, they close on their mortgage.
But the USDA construction loan simplifies that process through a construction-to-permanent loan, also known as a single close loan.
The process combines a construction loan and a traditional USDA mortgage into a single loan. Borrowers have just one mortgage closing before construction begins. As a result, they also have just one promissory note and one set of closing costs. Once the building is complete, youre left with a 30-year fixed-rate USDA loan.
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Choosing The Right Land
Confused about what to look for when buying land to build on? Youll need to find an area where zoning laws wont keep you from buying land for the investment property or home you want to build. Zoning rules set restrictions concerning things like the size of buildings and the kinds of businesses or residences that can be built.
Its also a good idea to make sure that the lands soil doesnt prevent you from building, digging a well or getting electricity and natural gas. Will the lands elevation be an obstacle? Are there any liens on the land or environmental problems that need solving? These are some of the questions youll need to answer before you can prepare to buy land.
While its possible to buy a house or a plot of land without the help of a real estate agent or broker, it can help to have someone on your side who specializes in working with vacant lots. A real estate professional can hold your hand through the entire process and help minimize hiccups. If youre opposed to using an agent, its still smart to find a real estate attorney who can address your legal concerns.
One important step to take before finding a lender is to have the land surveyed by a professional. This involves hiring someone to look at how accessible the land is, figure out its dimensions and find out whether anyone already has the right to use the property.
Send In Your Application
Once youve compiled all of the necessary information, you can send in your application. Make sure you verify your contractor and property location before submitting your application since both are necessary to qualify. Depending on your situation, it could take anywhere from 30 60 days to complete the loan process.
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How To Find A Usda Construction Loan
Although there are big potential benefits to a USDA construction loan, it can be difficult to find lenders offering them in practice.
Even the largest of lenders dont offer this program for many reasons. These include factors like longer closing time, higher risk to underwriting and investors, having to lock the rate longer, and needing to communicate with many moving parts over a long period, Duncan says.
An online search for USDA construction loan lenders should yield some lenders you can investigate.
I recommend choosing a lender that knows exactly what this process involves and has closed these loans before. You want someone transparent, upfront, and who doesnt sugarcoat or gloss over the details of what youre looking for, advises Mushlin.
