A series of guide has been written about financing a land purchase, but let’s say you are willing to buy a plot of land. Either you are planning to build a home on the land, use it for farming or any kind of business, you should know that the process is much different than obtaining a usual mortgage.
In the case you are planning to consider more creative methods of financing a land purchase, then you have landed on the right page.
Lenders take a bigger risk on land than on homes
When you go to lenders 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 but it’s very much easier to place a value on houses and to sell them after a foreclosure. The value of a plot of land can be harder to determine.
A better understanding of the lender’s point of view will aid you in developing a stronger case for your loan request. This as an advantage may also influence the plot of land you ultimately choose, and where you enter for financing.
What type of land should you look for?
Before you start searching, make a think about what you want the land will be used for. Most plots of lands are either categorized as improved or raw land.
Improved land has been altered by humans. The number of improvements might vary but they could include anything from utilities to a driveway or sewage system.
Raw or unimproved land on the other hand is in its natural state and has never been touched by humans. And this is of course, the hardest kind of land purchase to finance because it will be harder for lenders to re-sell in case of a default.
However, if you’re looking for land to build a home on, improved land might be the best for you. Also, the location of the land is more important than the state of the land. If you buy land in a developing area, there are higher chances of getting a higher profit on resale.
Do your homework before you make an offer
Now that you’ve figured out what kind of land you need and have found the plot of your dreams. You need certain information on the land you are about to acquire. You can choose to collect this information yourself if you have the time or instead, hire an experience real estate agent or attorney to help you.
Below is a checklist of things you might need to know before making an offer:
Before you make that offer, ask the sellers if they can provide a recent survey of the land. This is to know the boundaries of your property. It is very much important for land purchases especially in areas where the boundaries are not easily seen with homes in the neighborhood.
Having the land surveyed will help you out when you start to use the land. It will help you avoid disputes with neighbors over boundary issues.
This is a list of people or groups who have permission to enter or use part of your property. Easements may be the underground, through which they may build or extend sewer or water pipes, or somewhere else, which may be a cable company running wires through your land.
Having an idea of where the easements exist on the land you are about to buy will help you figure out where to build your structures.
This helps you figure out what easements are associated with your land. In some cases, you’ll discover the property’s history through its past deeds and any liens attached to the title.
This requires you to find out what your land has been zoned for to make sure it’s usable for your intended purpose. Residential and commercial sites are the two most common zoning designations, but you may also need zoning for agricultural and other special land uses.
This may control what you can build, such as single-family vs multi-family housing, or what you may place on the land, such as a mobile home.
Flood hazard risk
Extreme weather events seem to be on the rise, so it’s more important than ever to find out if your property is in a flood zone. You may use FEMA’s free Flood Map Service Center to find out if your plot of land is at risk.
If you’re already working with a real estate agent, they may be able to appraise the land’s market value by easily comparing recent sales on similar plots. Otherwise, you may need to hire a real estate appraiser to create a report listing all of the plot’s features and the total estimated value.
Create a land portfolio that tells your story
Once you’ve gathered this important information and agreed on a sale price, then you can approach a lender. Think of your land portfolio as a story about your plans for the land you want to purchase. Only in this case, you have to include the facts and figures lenders care about. In addition to the background information you collected first, the land portfolio should contain:
- Your credit report and credit score, to demonstrate your eligibility for financing.
- Architect’s sketch of your construction plans.
- Estimates on all relevant expenses such as utility installation, architect’s fees, and construction costs.
- Any profitable attributes of raw land such as the timber value of forested land.
When you borrow money to buy land, expect higher interest rates and down payment requirements than for a traditional mortgage. A land loan may also be classified as a construction or commercial loan.
If you’re buying land to build a home on, you can get a lower interest mortgage that pays off your land loan after construction is completed.
The local bank advantage
Whether or not you’re already signed up with a community bank or credit union, 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. They’re 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.
Other financing options
If you strike out at the bank or don’t like the terms they offer, there are alternatives.
Owner-financed loan: You draw up a promissory note with the seller outlining terms for you to pay the seller the price of the land over time.
Government loans: Known as Single Family Housing Direct Home Loans, they are available to lower income homeowners in rural areas who cannot find other financing. These loans can be used to purchase land for building a home on.
Home Equity: If you already own a house and have equity, you could use a second mortgage, home equity line of credit, or home equity loan to finance all or part of your land purchase.
Financing a land purchase may be more complicated than the traditional home mortgage process, but you shouldn’t feel discouraged. Find other landowners to talk to for advice and discuss your options with potential lenders.
As with any other debt you take on, you want to get the lowest possible interest rate and the most affordable monthly payment. Don’t forget to calculate the expense of property taxes and any maintenance, such as mowing.
Buying and owning land can be a very rewarding experience, even if you don’t build on it right away. Your plot of earth could turn into a valuable investment, a beloved home, an enjoyable vacation property, and/or a successful business.