Land loans are a special type of mortgage designed to finance undeveloped, improved or raw land, with rates typically being much higher than traditional home mortgages and usually necessitating larger down payments.
Local community banks and credit unions offer the best opportunity for obtaining land loans, as they know more about your area and may approve it more readily than larger national lenders.
Community banks and credit unions
Community banks and credit unions may not offer as wide of a range of financial products and services as larger institutions; however, they offer clients who prioritize customer service an ideal banking experience. They typically possess greater insight into local economies and cultures which is invaluable when lending real estate buyers money.
Fleming notes that it may be easier to secure a land loan from local lenders because they understand your area and can assess potential risks associated with lending money on raw land, but she advises shopping around since land loans tend to carry higher interest rates and require larger down payments than mortgages.
Another option is borrowing from a home equity loan provider, acting as a second mortgage. These loans tend to not be tax-deductible and must meet certain eligibility requirements in order to qualify. Finally, seller financing might also be an option, popular among builders looking to keep their building projects separate from personal finances.
Seller financing
Seller financing occurs when property sellers agree to lend buyers the funds required for purchasing property or businesses from them. It can take various forms, such as land contracts or lease purchase agreements. It works by giving buyers equitable title over time with an expected final balloon payment at the end of repayment term.
Buyers who struggle to qualify for traditional loans may find alternative financing advantageous, whether due to not having saved enough funds for a 20% down payment or poor credit ratings.
Seller financing can help streamline mortgage transactions and boost profits for property owners, while simultaneously decreasing red tape involved with mortgage transactions and increasing profit margins for buyers. It comes with risks, however, so buyers should carefully evaluate all their options prior to entering any agreement and seeking legal advice before signing any lending documents – this way your rights will be protected and you’re free to walk away if the terms don’t suit.
Home equity loans
Home equity loans can provide an accessible source of funds to assist with financing a land purchase. Lenders view them as less risky than personal or credit card loans due to using your house as collateral; additionally, you typically enjoy lower interest rates and may even be eligible to deduct them on your taxes.
To qualify for a home equity loan, you must have enough equity in your property to pay back what you are borrowing – usually at least 80% equity is necessary – as well as enough income to meet monthly repayment obligations.
Home equity loans come in various forms, from cash-out refinancing and home equity lines of credit to construction or land loans. You should choose one based on your needs and the type of land you plan to buy – its value can differ considerably depending on its location and demand for homes or other uses.
Mortgages
Mortgages are not typically used to buy land, though some lenders may provide them. They differ from a standard mortgage in that you cannot use your home as collateral for them, typically available for raw or unimproved land and typically requiring a large down payment or deposit payment as well as an outline plan showing how you plan to develop it.
Bare land can be hard to assess, making it more risky for lenders. Therefore, they often offer land loans at higher interest rates than conventional home mortgages.
Unsecured loans for land can be hard to come by for people with poor credit. Some lenders are more accommodating than others; it may be necessary to work with a specialist financing firm depending on your plans for the land, size of deposit required and permit requirements.