If you buy land instead of an existing house, because you want to build from scratch, you will probably need a land loan. And that poses more problems than getting a regular mortgage. On the one hand, there is no home to serve as collateral for the land loan.
Acquiring financing for land creates a different set of obstacles for potential buyers. Here are three things to consider before buying land.
Key takeaways
- Borrowing land creates a different set of obstacles than borrowing a home mortgage.
- Lenders require topographic boundaries, and you will need to verify zoning and land use restrictions on the property, as well as access to utilities and public roads.
- The more the land improves, like many that are ready to build, the lower the cost of the loan.
- The best sources of loans include seller financing, local moneylenders, or home equity loans.
- Rural lands may qualify for a USDA subsidized loan.
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1. Basics of land: boundaries, zoning, access
First of all, it is important to be clear about what the potential purchase entails. That is why it is crucial that surveyors mark the boundaries and have everything on paper ready for the lender’s presentation. Another important detail is to check the zoning and land use restrictions.
For many residences, access to public services is an important factor. Save a lot of time, money, and storage when your water, sewer, electricity, and cable hooks are ready to go. Similarly, public access to roads can be a key issue, as the buyer will need to obtain a permanent easement to access a public road if it is not already available.
It is also wise to check with your local planning department to find out what the future holds for your immediate neighborhood. A new park on the same street can increase property values for years to come, and a new road or sewage treatment plant is less likely to do so.
Because buying land is different from buying a house, it is a good idea to work with a real estate agent who specializes in these types of transactions.
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2. Planned land use: immediate construction, necessary improvements, speculative investment
Loan terms, such as the minimum payment and interest rate, generally depend on the intended use of the land, as this is directly related to the bank’s risk exposure. In this way, it is always more difficult to obtain a land loan than to buy an existing home, as an existing home gives the bank immediate tangible collateral, but new construction involves more moving parts – it could be terrible.
Starting with existing homes, the next step on the bank’s confidence scale is to build a ready lot with the intention of starting building a prime home right away. There are things that could go wrong, delay, or increase costs down the road, but the timing is still manageable in the bank’s eyes. The required upfront payment will generally be in the range of 15% to 25%.
Eventually, there are vacant lots with no specific plans to build anything, which is essentially a speculative investment. For example, a purchase on this land could anticipate the completion of a new highway adjacent to a project on this route. The hope would be that once the highway is completed, the land will be attractive to a developer to build a new subdivision with a convenient relocation to the city. The land could then be sold to the developer for a considerable profit. These loans may require an upfront payment of up to 50%.
Many underdeveloped are those that still do not have the necessary basic services. Unexpected problems and cost overruns are common, which can add months to the buying schedule.
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3. Land Loan Options: Finding Financing
In view of the above issues, you may need to do an additional search to finance the purchase of your land on acceptable terms. Try these fonts:
Seller financing
This can be a good option to obtain favorable terms, especially if the seller is eager to unload the land and the market is cool. As it is an agreement between two private citizens, everything is negotiable, from the advance to the interest rate. It is important that an attorney review the documents before signing any document to avoid escape routes and unpleasant surprises for either party.
Local banks and credit unions
Local banks and credit unions tend to be more favorable on land loans than the big giants. They can also offer better terms due to their local knowledge of the property. Similarly, prospective borrowers will be required to submit a loan package with specifications and plans for the land, as well as personal financial information to demonstrate their credit worthiness.
USDA loan
How can buyers buy land if banks and credit unions don’t offer to finance it? If the property is rural and agricultural, the buyer can receive federal assistance. He is United States Department of Agriculture (USDA) offers a range of subsidized loans with minimum requirements and advantageous terms.
Home equity loan
A buyer who already owns a property and is not heavily in debt may want to consider a home equity loan. This type of loan measures the equity of the existing property, granting much better terms than any regular construction or land loan.
The bottom line
Financing a property to build your dream home is much more complicated than applying for a mortgage. Lenders require topographic boundaries, and you will need to verify zoning and land use restrictions, as well as access to utilities and public roads. The better the land is improved, the lower the required prepayment and loan costs.
The best options for financing your land purchase include financing from a seller, local lenders, or a home equity loan. If you are buying a rural property, be sure to research if you qualify for a USDA subsidized loan.
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