Get Your Financing In Order
Because you plan to make a cash offer, youll want to get a few documents in order.
First, the seller is likely to want to see proof of funds. Sellers want to see that you can cover the down payment and closing costs. Proof of funds should be on an official letterhead from the institution where your funds are. The date, name of the account holder, and the balance of funds should all be listed.
Other examples of documentation for proof of funds that a seller might accept include a bank statement, a copy of a money market account balance, or an open equity line of credit.
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.
Loan Types To Consider When Buying A Commercial Property
So, youve decided to purchase a commercial real estate building and now you need to find a suitable loan, right?
As an investor, you should know that there are a few different ways to finance commercial real estate investments along with specific criteria that must be met. Choosing the wrong kind of loan can impact the bottom line, so understanding your options is important.
Every loan type will have its own set of pros and cons and your financing approach will depend on the property and the situation.; Its important to remember that not all real estate investment financing options are created equal. ;Here are some common financing options available for commercial properties.
BRIDGE LOAN:; Bridge loans or hard money loans, are short term financing options that are typically funded by a private lender rather than a large national bank.; These loans are used as an interim financing tool to buy properties in specific situations such as:
- Properties that are not stabilized
- Properties that need renovation
- Properties that require a fast closing, sometimes within weeks
Unlike conventional loans, bridge loans feature a faster closing process and higher leverage anywhere from 75% 90% of a propertys purchase price.; Bridge Loans are interest only . Interest rates are much higher than a conventional loan, often between 8-12%.
Choosing the right financing is an important component to real estate ownership and the loan choice will be dependent upon factors including:
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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.
Easy Accessibility To Loan Account Online
Access the status and details of your loan for residential plot purchases anytime and from anywhere through online account management. Easily check information related to your loans like the schedule of payment, payment tracking, and all other related information through the digital portal or Bajaj Finserv App. To get instant access to this online account, simply log in with the right credentials.
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Other Land Loan Benefits And Features Include:
- Term options up to 15 years
- Free 60-day rate lock, once a specific property is identified
- Up to 90 percent financing1
- No building requirements from the lender
- Option to set up automatic payments
1Additional qualifications including debt-to-income limits are required to obtain 90% financing on land loans.
- How much home can I afford? +-
- How much should I put down for a new home? +-
- How much will my mortgage payments be? +-
- Which mortgage loan is a better fit for me? +-
- Which is better for me: A 15-year or 30-year mortgage loan term? +-
Ready To Apply For A Loan Here’s What You’ll Need To Complete The Application:
- The amount you would like to borrow
- The number of years you want to finance your loan
- Your current employment and income information
- Your phone number and email
- Information for joint borrowers you plan to include on the mortgage loan
- An idea of the total amount you would like for your loan and monthly payments
For a list of all the documents often required to complete your purchase, download our Mortgage Application Checklist.
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Additional Costs And Requirements
For construction loans, lenders arent just looking at your buyer profile theyre also assessing the builder. If Im underwriting a , Im underwriting the builder. I need to know that builder is competent, said Kraft.
Approval is also more difficult for construction loans as there isnt a home or business to inspect and appraise. All the building plans, costs, fees and the feasibility of the building schedule will be closely considered. The builders previous work will likely be evaluated as well, so if your builder isnt up to par, then your loan will be denied.
Its important to keep an eye on the building process budget. If the budget grows beyond what the lender approved, the lender will probably require you to pay for it yourself or obtain a second loan to cover the cost. So dont go adding golden toilets and crystal chandeliers .
Loan For Land Purchase Faqs
Ans: Besides the value of the plot, your bank may consider several other factors like:
Ans: This depends on your bank’s requirements. For starters, the land you’re planning to purchase will be used as security by the bank. In some cases, the bank may request you to pledge additional assets as security as well.
Ans: Yes. However, you will need to construct a house on the land you’ve purchased to avail tax benefits. You will not get tax deductions if you’ve just bought a land for investment.
You should note that the deduction is only available on the loan amount you have borrowed for the construction and only after the construction is complete.
Ans: Yes. You will need to insure the land you buy and your repayments as well, in case of an unfortunate event. While some banks offer this as an option, some banks have a mandatory requirement. For further clarification, it’s best to contact your lender and ask them for more information.
Ans: The repayment options differ from bank to bank. For specifics, you can always get in touch with your bank via their customer care centre or visit their website to check the payment modes. The most common payment modes are the Electronic Clearing House and Post Dated Cheques .
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How To Finance A Land Purchase
Modified date: May. 26, 2019
A lot has been written about financing a home purchase, but what if you want to buy a plot of land? Whether you plan to build a home on the land, use it for farming or another type of business, or hold onto it as an investment, the borrowing process is different than obtaining a regular mortgage.
If youre ready to dive in already and youre looking for the simplest way of financing your land purchase, check out our list of the best mortgages available.
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.;
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What Type Of Land Should You Look For
Before you begin your search, think about what you want to use the land for. Most plots will fall into one of two categories: improved or raw land.
- Improved land has been added to or otherwise altered by humans. The number of improvements will vary but they could include anything from utilities to a driveway or sewage system.
- Raw or unimproved land is in its natural state, untouched by humans. This is the hardest kind of land purchase to finance because it will be harder for lenders to re-sell after a default.
However, depending on your purpose, raw land may be what you needif you want to start a farm, for example. You can make your application stronger with a story about what the land will be used for, including plans for any improvements you intend to make.
If youre looking for land to build a home on, improved land will be easier to work with. As an investment, location is probably more important than the state of the land. If you buy land in a hot or developing area, your chances of turning a profit on resale will be higher.
Things To Consider Before Buying
Before you dive in and purchase land for your hobby or recreation, we recommend considering a few items very carefully.;
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Using Land Titles As Collateral For Building Homes
Part of the frontier spirit of America is the desire to own land. However, the process of purchasing land has changed since the pioneer days. Land loans are less common now than they were in previous eras, and the marketplace for land loans is less competitive. But there are still a variety of options to choose from when looking to finance a piece of land.
Alternative Home Construction And Renovation Loans
Here are a few other construction loan options to consider if youre having trouble finding USDA loans, or simply want to widen your search:
- A VA one-time close construction loan These loans, backed by the Department of Veterans Affairs, are available to qualified veterans and active-duty military members. Like USDA loans, they can provide up to 100 percent financing
- An FHA one-time close construction loan Backed by the Federal Housing Administration, these loans require as little as 3.5% down and have lenient credit guidelines
- A conventional one-time close construction loan Conventional loans, backed by Fannie Mae and Freddie Mac, typically require a credit score of 620 or higher and at least 5% down
- AnFHA 203k loan Can be used to finance the purchase price and cost of renovations on an existing fixer-upper home. Requires only 3.5% down and a 580 credit score;
- A traditional USDA home loan that can be obtained after getting a separate lot loan and/or construction loan
The right type of construction loan depends on your location, home building budget, credit score, and down payment, among other factors.
You should make sure youve explored all your options and found the best loan for you before signing on.
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What Are Land Loans
A land loan, as its name suggests, is used to finance the purchase of a tract of land. Land loans are a very small slice of the lending market and tend to be riskier for lenders than mortgage loans, explains Casey Fleming, a mortgage adviser with C2 Financial Corp. in San Jose, California. If a lender has to foreclose on a land loan, theres no guarantee of recovering the money.
Owners of raw land are much more likely to stop making payments and walk away from the property in the event of a financial event in their lives, Fleming says. If you own your own home, youll do anything you can to save it. With raw land, you cant use it or generate any income off it.
Vacant land is much harder to sell than a lot with a house on it because there is less demand for land than there is for already-constructed homes.
Most people cant handle buying land and building something on it, says Fleming. It involves a lot more time and money than people expect. Even if its a fixer-upper, people want something they can start with and work from there.
When you consider these realities, its easy to see why a land loan is likely to have less-favorable terms than a mortgage loan. Some lenders require a substantial down payment and charge higher interest rates on land loans. Also, some land loans have significantly shorter repayment terms than a typical 15-year mortgage or 30-year mortgage.
Planned Use Of Land: Build Immediately Improvements Needed Speculative Investment
The terms of the loanssuch as down payment and interest ratetypically hinge on the intended use of the land, since this is directly linked to the bank’s risk exposure. In this way, getting land loans is always trickier than buying an existing house, since an existing house gives the bank immediate, tangible collateral, whereas new construction has more moving parts that can go awry.
From existing homes, the next step down on the bank’s confidence ladder is buying a build-ready lot with the intention to start construction of a primary dwelling right away. There are things that could go wrong, cause delays, or increase costs along the way, but the timetable is still manageable in the bank’s eyes. The required down payment will typically be in the 15% to 25% range.
Finally, there is raw land with no specific plans to build anything, which is basically a speculative investment. For example, a project in this vein could involve buying land in anticipation of the completion of a new freeway nearby. The hope would be that, when the freeway is completed, the land would be attractive for a developer to build a new subdivision with a convenient commute into the city. The land could then be sold to the developer for a tidy profit. These loans may require a down payment of up to 50%.
Unimproved lots are ones that do not yet have the basic required services. It is common to run into unforeseen problems and cost overruns, which can add months to the purchase timeline.
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Home Equity For Land Purchases
If youre a homeowner, you might consider borrowing from yourself to fund your land purchase. A home equity loan allows you to borrow against the equity in your home, without paying a down payment.
For homeowners who have a great deal of equity, this can be an attractive option.
Many lenders will allow homeowners to borrow up to 80% of the equity in their homes. Plus, home equity loans offer substantially lower interest rates than other land loans and often have longer repayment terms.
However, home equity loans come with inherent personal risk. Because your home is the collateral, if you default on your home equity loan payments, you could lose your house.