Are you thinking about getting a loan for land? Below is a complete guide to land loans. With the Federal Reserve pledging to keep rates low in 2018 and mortgage lenders expanding their guidelines on land loans, you can expect many investment and construction opportunities to arise as a result. Keep this article as a reference so that you can get the best deal and land loan rates.
Overview of Land Loans
From the lender’s perspective, loans for land are some of the riskiest loans. That said, this will depend upon the type of land that you want to buy and what you want to do with it. The most likely way to be approved for loans for land if you show that you are going to use it immediately and have a use for it.
Here are the vital considerations when getting a land loan:
#1 What Improvements You Intend to Make on It
The hardest type of land loan to get without question is for raw land that has not been improved, and which you do not intend to improve. Raw land means there are no structures on it, utilities or sewers. If you want to get a raw land loan, you can expect to need to put down a hefty down payment as high was 50%. Also note that the rates for a raw land loan are usually higher.
#2 Have Construction Plans to Get a Better Deal
Getting an improved land loan with plans for future construction is the easiest type of land loan to acquire. This means that the piece of land has been zoned and has many of the features that raw land does not have. Banks like to see construction plans on the piece of land because that eventual construction will lead to higher values for the lender in case you do not pay the loan.
#3 Know the Land and Geography Well
Before you consider getting a land loan, you need to really understand the area where you want to buy. You should pay a surveyor to review the property for you, get title insurance and see how good the access is to the property.
It is a good idea to use a local lender for land as they probably know the area where you want to buy.
#4 Understanding Your Land Financing Options
The most popular way to get a land loan is to use a third-party loan from a bank or other type of lender. However, keep in mind that a third-party loan is not always easy to get, and the cost may be higher due to the various lender requirements. Land loan rates can vary dramatically, so talk to several sources. These typically include:
- Title search
- Title insurance
- Land survey
- Closing costs for the attorney
With a regular bank, the credit score of the borrower and his or her financial strength is of most importance. Whether you can get a loan or not for the property that you want will depend upon the size of the project, the location and how feasible your plans are for the land. Generally, only the best projects with those with good financial strength and credit will be considered. You will usually need to come to the deal with at least a 30-40% down payment, and there will be full recourse to the borrower, and rates can be high.
If your land project does not meet the above criteria, you may need to look at other sources for financing. Community banks have been a popular option in the past. You also may be able to find a private finance organization or a capital fund. You still will need to come to the deal with equity in the deal of 30-40%, and origination points could be in the 3-5% range and up to 10% interest.
#5 Consider Owner Financing for Land
Owner financing is a good option to a third-party loan. Most often, owner financing is done with a land contract. With a land contract, you the land buyer make payments by installment. Many owner finance deals with a land contract may have a final balloon payment.
But with a land contract, you do not actually own the land until you have paid off the purchase price. So, you will not actually get title to the property until the entire debt has been paid. The seller also keeps full interest in the value of the land until you have paid the purchase price.
#6 Consider a Home Equity Loan or 401k Loan
Some people take out a home equity loan to buy land that they want to improve, such as to use to build a second house. If you decide to do this, there is less risk for the lender as they have collateral with your current home. A refinance may also be possible if you do not have sufficient equity in the property.
A 401k loan is also a good option for a short-term land loan. Note that your employer may not allow you to do this type of loan, but some will.
#7 Consider a Portfolio Loan or Credit Union
A portfolio loan is simply one that is not sold after the loan is done. Many big banks sell their loans after closing to a servicing agency so that they can free up their capital and do more lending. Some specialty lenders and credit unions may keep some of their loans in house. This means that the loans do not have to meet secondary market standards and can be more creative.
Even if this is a possibility, the lender will still want to see you are in a strong equity position and will want a 20% or more down payment.
The Bottom Line on Land Loans
Many people dream of buying a piece of land and building their dream home on it. There are a variety of ways that you can get a land loan. Just remember as we noted above that you will need to have good plans for what you intend to do with the piece of land to get approved for the loan. We think one of the best options for financing a land loan if you can is to pull cash out of a current property until you get the home or improvement completed.
References: Type of Loan Needed to Purchase Land. (n.d.). Retrieved from http://homeguides.sfgate.com/type-loan-needed-purchase-land-37621.html