How to Finance a Land Purchase
Posted: January 17, 2015 by LandCentury
When youre going to buy land, youll find that land loans work much differently than other types of real estate financing. There are loans that you can get and will want to secure, but first, you need to know the difficulties ahead.
From a lenders point of view, there is a huge risk when financing a land purchase. Why? Lets take a look at the facts.
- Borrowers can easily stop paying land loans.
- Real estate with a building or structure is a form of collateral.
Unless plans for the land are ready to be put into action, land is a much higher risk for the lender. If you purchase a home and decide to stop paying the mortgage, the lender can repossess the home and sell it to recuperate their money.
When it comes to vacant land, the lender can still repossess the land, but they will have a harder time selling it at a break-even point. Obviously, with higher risks comes a harder time finding land loan financing. As a buyer, you need to have some money on hand for your purchase as you will see shortly.
This is a very tricky question to answer. If there is a property on the lot, youll be able to get a regular mortgage. Otherwise, youll be looking at whats called a construction loan. These are loans that are given based on the fact that you will construct a building on the property in the near future.
These loans often require you to have plans on what youre going to do with the property. An inspection and plans may be required to get the loan.
If you want to purchase just the land and dont have any plans for immediate construction, youll need a raw land loan. These loans are very difficult to obtain because the investment is not one that will grow in value quickly.
Now that you know what a traditional lender will offer, its important to know other options you have available to finally make your purchase. First and foremost, the loans above will require a 20% - 50% down payment.
If you want to secure financing using another avenue, the following options are available:
Seller Financing
If you want to buy land for sale with no credit check, the easiest option is either: a large down payment or seller financing. When buying from a seller, you will be paying the seller directly instead of paying a lender. Essentially, the seller will take the lenders place.
In this case, youll:
- Easily obtain a loan.
- Make monthly payments to the seller.
- Must pay the loan back faster.
Most seller financing options require a short repayment period, typically 5 years. At the end of the 5 year contract, youll need to pay the entire balance left on the loan.
Home Equity Purchases
Do you currently have a home? If so, you can choose to take out equity against your home to finance your purchase. This works in the following way:
- You take a loan out on the equity you have paid into your home.
- The equity loan will be rolled back into your mortgage.
- You use the money from the equity loan to purchase the land for sale.
Its a simple process. If youve paid into a loan, you can essentially take that money back out of the house and buy land. If youre buying a very high priced piece of land, this will mean that your loan payments will go up accordingly.
Credit Unions
Credit unions are smaller lending institutions that have rules that are more relaxed than a traditional lender. Oftentimes, credit unions have lower down payment requirements and provide a very pleasing level of customer service.
If youre stuck trying to get a loan, a credit union is the first place you should look.
Talk to one of the loan advisors in your local credit union and ask them for advice on getting a loan for your perfect piece of paradise.
Sometimes, land can be purchased for under $5,000. These are small loans and a $1,000 down payment will allow you to secure a loan from most lenders. If you have the entire amount in cash, you can:
- Secure a loan much faster - if you want a loan at this point.
- Can negotiate lower sale prices from sellers.
The real deals come when you have enough cash to purchase land outright. This is not the norm for most buyers, but its a great option that you need to consider. Taking out loans from family members and providing a cash payment will eliminate the need for interest and allow you to purchase land for a huge discount.
Cash can also come from tax rebates, bonuses or selling a used vehicle.
Lenders Take a Risk With Land
From a lenders point of view, there is a huge risk when financing a land purchase. Why? Lets take a look at the facts.
- Borrowers can easily stop paying land loans.
- Real estate with a building or structure is a form of collateral.
Unless plans for the land are ready to be put into action, land is a much higher risk for the lender. If you purchase a home and decide to stop paying the mortgage, the lender can repossess the home and sell it to recuperate their money.
When it comes to vacant land, the lender can still repossess the land, but they will have a harder time selling it at a break-even point. Obviously, with higher risks comes a harder time finding land loan financing. As a buyer, you need to have some money on hand for your purchase as you will see shortly.
What Type of Loan Is Needed to Buy Land?
This is a very tricky question to answer. If there is a property on the lot, youll be able to get a regular mortgage. Otherwise, youll be looking at whats called a construction loan. These are loans that are given based on the fact that you will construct a building on the property in the near future.
These loans often require you to have plans on what youre going to do with the property. An inspection and plans may be required to get the loan.
If you want to purchase just the land and dont have any plans for immediate construction, youll need a raw land loan. These loans are very difficult to obtain because the investment is not one that will grow in value quickly.
How to Finance a Land Purchase
Now that you know what a traditional lender will offer, its important to know other options you have available to finally make your purchase. First and foremost, the loans above will require a 20% - 50% down payment.
If you want to secure financing using another avenue, the following options are available:
Seller Financing
If you want to buy land for sale with no credit check, the easiest option is either: a large down payment or seller financing. When buying from a seller, you will be paying the seller directly instead of paying a lender. Essentially, the seller will take the lenders place.
In this case, youll:
- Easily obtain a loan.
- Make monthly payments to the seller.
- Must pay the loan back faster.
Most seller financing options require a short repayment period, typically 5 years. At the end of the 5 year contract, youll need to pay the entire balance left on the loan.
Home Equity Purchases
Do you currently have a home? If so, you can choose to take out equity against your home to finance your purchase. This works in the following way:
- You take a loan out on the equity you have paid into your home.
- The equity loan will be rolled back into your mortgage.
- You use the money from the equity loan to purchase the land for sale.
Its a simple process. If youve paid into a loan, you can essentially take that money back out of the house and buy land. If youre buying a very high priced piece of land, this will mean that your loan payments will go up accordingly.
Credit Unions
Credit unions are smaller lending institutions that have rules that are more relaxed than a traditional lender. Oftentimes, credit unions have lower down payment requirements and provide a very pleasing level of customer service.
If youre stuck trying to get a loan, a credit union is the first place you should look.
Talk to one of the loan advisors in your local credit union and ask them for advice on getting a loan for your perfect piece of paradise.
The Power of Cash
Sometimes, land can be purchased for under $5,000. These are small loans and a $1,000 down payment will allow you to secure a loan from most lenders. If you have the entire amount in cash, you can:
- Secure a loan much faster - if you want a loan at this point.
- Can negotiate lower sale prices from sellers.
The real deals come when you have enough cash to purchase land outright. This is not the norm for most buyers, but its a great option that you need to consider. Taking out loans from family members and providing a cash payment will eliminate the need for interest and allow you to purchase land for a huge discount.
Cash can also come from tax rebates, bonuses or selling a used vehicle.
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