Created on Saturday, March 05, 2016
Updated on Monday, February 26, 2018
by Land Century
Historically, financing land has never been easy, but its not impossible either. Depending on your plans for the property, there are several different types of loans you can get for buying, flipping or building on land.
Loans for Buying Land
If you plan on buying vacant land with no immediate plans to develop it, your options are relatively limited. Raw land is the most difficult to borrow against simply because its considered a speculative investment. By definition, raw land doesnt have any added improvements, and even though you have no plans to develop the property anytime soon, youll still be responsible for paying property taxes.
Land and Lot Loans
Major banks and credit unions both offer land and lot loans, sometimes referred to as raw land loans. Not all lenders offer this type of loan, and you need to come prepared if you hope to have the lender agree to extend you a loan. Consider creating a concept packet that demonstrates your vision for the property and how you plan to pay back the loan. Also, consider offering additional collateral to guarantee the loan.
If you choose to go with a traditional loan, be prepared to provide a higher down payment and for the loan to come with a higher interest rate. Some lenders will require a 50% down payment, but there are still many that will only require a 20% down payment. It may be easier to obtain a loan if you work with a lender whos local and familiar with the area. If you find that big banks are not willing to extend you a loan, consider credit unions. Many offer competitive rates. Regardless of which route you take, youll need to ensure that you have a convincing plan for the property.
If you cant obtain a loan through a traditional lender, owner financing is another consideration. Many sellers are willing to offer short-term financing, but be aware that the terms will vary depending on the seller. One advantage that owner financing offers is that you will be able to negotiate with the seller for a better price or more favorable terms. Many lenders will be open to negotiation, especially if they have been trying to sell the property for a long time. While owner financing can be a favorable option, its important to have a real estate attorney guide you through this process.
Loans for Flipping or Building on Land
If youve found a piece of land and have plans to build a home right away, you have a few different options when it comes to loans. Generally, its much easier to obtain financing if you already have development plans in place.
What types of loans are available?
A construction loan is the most basic type of loan you can get for building on a vacant lot. This type of loan will fund the construction of a semi-custom or a completely custom home from the ground up. A construction loan is a unique product that works a little differently than a typical mortgage. One major thing to consider is that these types of loans are short-term, and are funded in periodic advances. In other words, theyre not fully funded at one time like when youre purchasing an existing home or plot of land. In essence, youll receive your financing over time, rather than all at once.
Its important to note that this type of loan is still more difficult to obtain than a traditional mortgage, and the financing terms are less favorable. Expect to fill out a mountain of paperwork, pay additional transaction costs and put down a larger down payment. Youll also be faced with the possibility of higher interest rates. Typically, construction loans take longer to get approved and to be processed. And once the construction is done, youll need to convert to a traditional, permanent mortgage.
At one time, the only option you had when building a home was to first take out a construction loan, and then convert that loan into a long-term mortgage. As a result, you had to go to two closings, pay high transaction costs and pay duplicate fees.
Now, its possible to obtain a construction-to-permanent loan, better known as an all-in-one construction loan. This is very similar a basic construction loan, but will automatically convert into a permanent mortgage when construction is complete. This way, you only have to endure one closing and take out one loan. When choosing a regular construction or construction-to-permanent loan, you can use these loans to construct a home on a piece of property that you already own, or finance the purchase of a new lot.
In certain scenarios, you may be able to obtain a traditional mortgage when building on land. Lets say that you already have a home-builder in mind who owns the lot and is willing to provide you with a turnkey home. The builder may be willing to fund the construction of the home, and all you would have to do is obtain a traditional mortgage to buy the home from the builder once the construction is complete. In this case, the process is not unlike buying an existing home.
Whenever a buyer purchases a home directly from the builder, a traditional mortgage is typically the most practical and viable option when it comes to financing.
These are the most common loan options available when buying raw land for investment purposes or to develop. Whether you plan on flipping land, building on it or simply holding onto it for the future, financing options exist if you dont have the cash on hand to fund the transaction. Just bear in mind that most lenders will require a higher down payment and higher interest rates when financing land. If youve found the right property, its often worth these additional costs.