How to Finance a Land Purchase

A series of guides have been written about financing a home purchase, but let’s say you are willing to buy a plot of land. Whether you plan to build a home on the land, use it for farming or do any business, you should know that the process is much different from obtaining a standard mortgage.

How to Finance a Land Purchase

In the case you are planning to consider more creative methods of financing a land purchase, then you have landed on the right page.

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Lenders take a more considerable 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 much easier to place a value on houses and 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 sure you think about what the land will be used for. Most plots of land are either categorized as improved or raw land.

Humans have altered improved land. 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 most complex kind of land purchase to finance because it will be harder for lenders to re-sell in case of a default.

How to Finance a Land Purchase

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 higher resale profit.

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 specific 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 experienced real estate agent or attorney to help you.

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Below is a checklist of things you might need to know before making an offer:

Land survey

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 essential for land purchases, especially in areas where the boundaries are not easily seen with homes in the neighbourhood.

Having the land surveyed will help you out when you start to use the land. It will help you avoid disputes with neighbours over boundary issues.

How to Finance a Land Purchase

Property easements

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.

Knowing where the easements exist on the land, you are about to buy will help you figure out where to build your structures.

Title search

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.

Zoning laws

This requires you to find out what your land has been zoned for to ensure it’s usable for your intended purpose. Residential and commercial sites are the two most common zoning designations, but you may need zoning for agricultural, and other unique 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 determine if your plot of land is at risk.

Appraisal

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 portfolio that tells your story

Create a land portfolio that tells your story

Once you’ve gathered this vital 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 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 good attributes of raw land such as the timber value of forested land.
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When you borrow money to buy land, expect higher interest rates and down payment requirements than 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, 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 the risk of 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.

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.

Summary

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.

Summary

Buying and owning land can be an enriching 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 a successful business.

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