Traditional Financing Options
If you are shopping for a land loan, the first place to start is with a local bank or credit union. Local is key here, because as part of the community the lending institution will have a better idea of the value of the land you are planning to purchase. Local lenders also have a vested interest in the growth and sustainability of the community itself, and as such may be more likely to underwrite a land loan than a national lender with little or no regional presence. That being said, when borrowing money from a local bank or credit union you should be prepared to overcome some challenges, and you may have to shop around until you find a lender willing to give you a loan with satisfactory terms and interest rates. Keep in mind, that lenders consider land loans to carry a higher risk, particularly if you have no immediate plans to build on your lot, and as such they may be subject to the following restrictions:
Lower Lending Limits – Even if your credit is in great shape, the lender ount of money you can borrow against your purchase. People with bad credit will have even lower limts.
Larger Down Payments – Land loans typically require a larger down payment than traditional mortgages, often as much as 20% to 30% of the asking price. If you are purchasing raw land, the preferred down payment can be as much as 30% to 50% of the total cost.
Higher Interest Rates – Again, due to the high risk nature of land loans you should expect to receive a higher than average interest rate from your lender.
Shorter Loan Terms – Land loans typically have shorter, and more restrictive, repayment terms. You may be able to extend the loan terms if you qualify for a construction-to-permanent loan. If you are intending to purchase raw land, you should expect the loan terms to be even more restricted, with terms be limited to under 10 years.
While it may be easier to secure a loan from a local bank or credit union, you should be prepared to pay some additional fees over and above payday loans Illinois the cost of the loan itself. These fees are mandatory, and are used to cover the following requirements:
- Title Search
- Title Insurance
- Land Appraisal
- Land Survey
- Attorney Fees
As always, the bank or credit union will review your personal credit history before approving you for any loan. It will also have a significant impact on how that loan is written, what interest rates you are offered, and how much of a down payment you will be required to pay up front. Before you apply for a land loan, review your credit report and credit score so you can come to the negotiating table fully informed.
Owner financing is an attractive alternative to traditional lenders, and in some cases may be easier to obtain. Of course, in this scenario financing is entirely left to the discretion of the land owner, so you will have to be prepared to negotiate a favorable deal. Still, if you have been turned down by your bank or credit union, owner financing is your next best option.
When it comes to buying land, there are two basic forms of owner financing – ‘contract for deed’ and ‘mortgage/trust deed’. Each has its own advantages and disadvantages for both buyer and seller.
Sometimes referred to as a ‘land installment contract’, this allows the buyer to pay the land owner in installments over a predetermined period of time. Typically, there is a final balloon payment that further compensates the seller for financing the purchase. The upside of contract for deed financing is that it is often easier to obtain, particularly for people with poor credit scores or less than perfect credit histories. The downside is that the seller retains the deed to the land in question, and only transfers it when the debt is fully paid. If you, as a buyer, are thinking long term this is an excellent solution. However, if you have a construction plan in motion it will be delayed until rights to the land are fully transferred.