Cautions To Consider When Financing A Land Purchase
- It can be difficult to get financing. Because land is hard to sell if you default on your loan, lenders are often less likely to finance your purchase without proof of a solid plan.
- A high down payment may be required. Land loans especially raw land loans, where the land is not already improved can require high down payments. Be prepared to put down 30% to 50% of your land cost when you get a loan.
- Good credit is required. Because a lender is likely taking a big risk to help you buy your land, youll need good to excellent credit for most land purchases. Lenders want to be sure youre able to handle your money and make timely payments before they commit.
- Youll need to know the area. If you dont know the area, easements, property values and geographic concerns like flooding or tornadoes, you might not be prepared for potential damage to your property. Do your research before you start the buying process so that you dont face an expensive surprise in the future.
What To Know About Mortgages For Land
Are you planning to buy a plot of land to build a new home? Are you investigating a land loan? If you need financing, you may find it more challenging to get a loan for land from traditional lenders.
Land loans are a more specialized finance product that will be available from fewer lenders.
When you are purchasing land, there is often a more significant down payment requirement than buying a home. So, its doubtful you will be able to put down a minimal amount of money with a land purchase.
Quite often, with land mortgages, there will be a higher interest rate and less time to repay the loan than you will experience with a house. These are obviously essential considerations to know when moving forward. If you decide to apply for a land loan, its vital to know the ins and outs.
Loans for land are far less commonplace than mortgage financing for a home. Given this, it can be more difficult to get a land loan. There are far fewer lenders that provide land loan financing when compared to homes.
Lets review the options if you need help to purchase land.
Can You Do The Work
What if you want to do all of the building work yourself? Unfortunately, that makes things even more difficult. Banks are hesitant to work with owner-builders. Banks fear that non-professionals have a better chance for delays and problems. Unless youre a full-time professional contractor with years of experience, youll probably have to hire someone else.
What Are The Pros And Cons Of Land Loans
Land loans have some benefits and some drawbacks.
If youre on the fence about whether this is the best route for you, lets talk about why you may or may not go this route.
The main advantage that a land loan offers to the borrower is the ability to purchase land.
This could be in order to buy farm or ranchland.
Or it may be to build a home or business with all of its customizations.
With a land loan, youre able to utilize an up-and-coming area for either residential or commercial purposes.
Overall, a land loan can be risky.
There is no collateral, which makes you more likely to be turned down by a lender.
The lender can also levy an incredibly high down payment, which you may not be able to make.
Or they could choose to set a high interest rate.
Regardless, theres a lot of unknowns and a lot of them arent great when youre heading into a construction project that could get pricey in itself.
Does Alternative Financing Exist
Yes! You can absolutely purchase land without taking out a land loan.
Because land loans can be difficult to get, it is wise to look at other options.
There may be something more suitable for your needs.
Heres alternative financing you may consider.
Home equity loan:
Home equity loans dont require a down payment.
Typically, you can also lock down a lower interest rate regardless of what you plan to do with the land because your home is what is securing the loan.
The interest you pay is not tax-deductible because youre not using the loan to buy, build, or improve the home that you used as collateral.
Your repayment term will ultimately depend on the lender you use, but it could be as long as 5 to 30 years.
Beware of this loan if this is a risky financial situation for you because defaulting on the loan could ultimately mean losing your home.
For those with poor credit, seller financing is an increasingly desirable option for some buyers.
This type of agreement allows buyers and sellers to make an agreement directly with a lender as an intermediary.
This is convenient for those who may struggle with their credit score .
It often results in more flexible agreements than a financial institution would offer.
FHA Construction Loans:
FHA construction loans are construction-to-permanent loans that are backed by the federal government.
Even better, FHA construction loans also cover the cost of the land!
USDA Guaranteed Loans:
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Everything You Need To Know About Land Loans
Buying a parcel of land, either as a long term investment or on which to build a new home, is not quite as simple as you might think. Unless you’re in a position to pay cash up front, you’ll need to borrow some money to finance the purchase. But borrowing money to purchase raw land is not quite that straight forward.
Land loans are unique financial products, and they are handled differently than mortgages and other secured loans. If you’ve never purchased land before, you may find the process a bit more challenging than you expected. But a short primer should help you understand how land loans work, and what your options are when looking for a lender.
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.
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Lenders Take A Bigger Risk On Land Than On Homes
When you go to a bank or other lender to borrow money for a land purchase, they have to evaluate not only your credit history but also how easy it will be for them to recoup their investment if you default on the loan. While its relatively easy to place a value on houses or condos, and to sell them after a foreclosure, the value of and demand for a plot of land can be harder to determine.
Understanding the lenders point of view will help you develop a stronger case for your loan request. It may also influence the plot of land you ultimately choose, and where you go for financing. Well discuss those options in separate sections below.
Usda Construction Loan Drawbacks
On the downside, these loans are difficult to find and rarely offered by lenders, according to Richie Duncan, senior loan officer with Nationwide Home Loans Group, a division of Magnolia Bank.
USDA construction loans require patience on the part of everyone involved. They take longer to close, could involve Realtors, insurance agents, city or county permitting requirements, builder approval, multiple underwrites of your credit file, appraisals, and more, Duncan notes.
And the interest rate youll be charged will likely be higher than for normal purchase and refinance loans on existing homes.
However, you might not be stuck with that higher interest rate forever.
After your home is built and after making six on-time payments, if market conditions allow you can opt for a streamline refinance or rate-and-term refinance to lower your interest rate, if possible, adds Duncan.
While there are many requirements and restrictions involved, once obtained, this is one of the best loans for a borrower to build their dream home with little to zero paid out-of-pocket, says Duncan.
As a result, you can save your liquidity, increase your landholdings, and avoid the higher 10 to 25 percent down payment requirements that other traditional lenders may stipulate with more associated risks.
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Getting Your Loan And Your Land
Getting mobile home loans with land isnt always easy. So, how can you increase your odds of getting a land loan for a manufactured home you love?
First, its important to know what you can expect. You can start by using the financing pre-qualification tools that many dealers offer to get an idea of what you may qualify to borrow, as well as checking the price of manufactured homes similar to what youre looking for. Take stock of your situation and familiarize yourself with the different types of mobile home loans.
Another important step is to check your credit score regularly and continually work to improve it . Actions, like paying down debt and keeping card utilization low, will always help your ability to get a loan, no matter what kind. Finally, its crucial to ensure that the mobile home and/or land you borrow against is well-maintained and HUD-compliant, as lenders want to see a commitment to maintaining your investments value and following the law.
The process of obtaining a mobile home loan with land can present some challenges, but dont let it keep you from your dream home. For more in-depth information on the process of choosing and financing a manufactured home, be sure to dive into other sections of our Buyers Guideits full of useful tips, the information you need to know, and more.
These Loans Are Different
Most homeowners are familiar with the typical mortgage loan used to finance the purchase of an existing, already-built home . Purchase money loans are the standard of the residential lending industry, and entire financial markets, mortgage products and automated systems have been created to make these loans efficient and easy for banks to underwrite and process.
But conventional purchase money mortgages are different from lot, land and construction loans both in how they are structured and how lenders underwrite, process and account for them and understanding these differences is perhaps the most important takeaway that potential borrowers need to grasp before seeking a loan for buying land or building a home. Read about whybanks treat these loans differently.
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How Do I Find A Land Loan
Are you looking to get a land loan of your own?
Often, its easiest to do this from a specialize bank , community bank or credit union located near the land youre looking to buy and build on.
You may also want to contact a mortgage broker, who should know which banks are will to issue land loans.
Its worth noting before you start this process that land loans are more difficult to get than mortgages, so youll want to be prepared for this process.
Cast a wider net if necessary and dont get discouraged.
The type of lender youll need depends on what you plan to build on the land and what type of investment you make.
If youll working with a builder, they can often let you know where to look as well.
Use A Home Equity Loan
If you already own your own home, another option is to use a home equity loan to purchase the land. In this case, a home equity loan will act as a second mortgage. You’ll receive the money in one lump sum and will be expected to make regular payments on both the principal and interest of any amount you’ve borrowed.
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How To Find A Land Loan
Where youll want to look for a land loan depends on what you want to do with the land. Generally, land loans are more difficult to find than traditional mortgages, says Robin Kencel, a real estate agent with Greenwich, Conn.-based Compass Real Estate. She says some lenders are cautious about issuing land loans. If the loan is defaulted on, they need to sell that property to get the money back, said Kencel, and its often more difficult to sell raw land.
With no structure yet built on the property, lenders may view these buyers as having less skin in the game. If construction plans fall through or the buyer no longer wants the land, the risk of default increases. This is why some lenders will offer mortgages, but not loans for raw land or construction loans. Simply put, land loans are riskier.
Kencel says she often recommends a specific bank or mortgage brokers to clients seeking land loans since brokers have a wider net for finding lenders. The type of lender you need depends on what you plan to build on the land or if you just want a vacant parcel to keep as an investment or develop later.
Raw land loans can also be found through specialized lenders , credit unions and smaller local lenders familiar with land in the area.
Building A House: A Breakdown Of How Much It Costs
If youve spent hours browsing homes online and in person only to find dealbreakers with every single one, you may have considered giving up on buying a house altogether and opting instead to build your own place from the bottom up.
Building your own house can come with a lot of benefits, the main one being that you have the opportunity to get exactly what you want and create a house that checks off every item on your want and need lists provided you can afford it.
So, can you afford it?
Using Land As Collateral For A Construction Loan
While almost all home builders require a down payment to get started, Madison Homebuilders does not, with few exceptions. Madison Homebuilders builds your home on the strength of our companyso under average circumstances there is no need to even apply for a construction loan, saving thousands in construction loan interest. This post is a guide for those who are working with a home builder that requires a construction loan as part of their process and are thinking about using existing land equity to get a loan or line of credit to use as their down payment.
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.
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How Much Does It Cost To Buy Land And Build A House
The average cost to build a house is $296,652 , according to a 2019 survey conducted by the National Association of Home Builders . Your actual costs will depend on factors like the price of your building lot, your new home’s size, and the cost of building materials in your area. Buying land to build a house? Learn how to get a cash-back refund when you close!
Weeks 7 To : Mechanicals
While this step may not be as dramatic as putting up the walls and roof of your home, installing the mechanicals will allow you to go to the bathroom inside rather than in an outhouse in your yard. The mechanicals include plumbing, electrical systems,your heating and cooling units, as well as wiring your home for a security system if you choose to have one.
Once the mechanicals are installed you’ll have running water, working outlets, and enough wiring for light fixtures and appliances. Because insulation typically covers up wiring, an inspector will generally give the go ahead on your electrical systemsbefore adding insulation.
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