Many people dream of owning a piece of land. Whether it’s flat grassland or a meadow with a view of the mountains, land can be like a blank slate on which to draw your future life. Perhaps you want to build a house or use it as a vacation retreat.
While land is less expensive than a house, it is not cheap. Most people need financing to buy land.
If you want to buy property, either to build a house on or to keep as an investment, note that land financing requires a different kind of financing than house mortgages and other types of loans. It is more difficult to get than other types of financing. But, it is possible.
Lenders look at what is backing or securing their loans. In home mortgages, for example, the loan is secured by the home. Should a mortgage holder stop paying the mortgage, the bank has the house as collateral. They can take it back and sell it to get their money back.
With a loan on land, lenders have much less collateral. While they can take back the land if a borrower defaults on payments, it is much harder for a lender to resell land than it is to resell a house.
So what are the financing options? There are several.
An acquisition and development loan (A&D) is a popular option for funding commercial real estate. Advanced funding can be used to purchase and make improvements to an unimproved land parcel. An A&D loan can be a good choice when buying raw land that will be developed or if the land is already developed and needs improvements.
The best option for getting a land loan is to go to regional and local banks and credit unions. Ask local realtors and title insurance companies for the names of local banks and credit unions that provide land loans.
Local lenders are generally knowledgeable about their community and more willing to invest in it than a national bank would be. In fact, large national lenders do not typically offer land loans.
Land loans are likely to have different terms than other types of financing. All of these result from the lender’s perceived risk in making a land loan. You may be able to get a down payment of 20%, the same as for a mortgage. But it is more likely that you will need up to 50% of the total as a down payment.
Loan terms are shorter for land loans than for mortgages. A standard mortgage loan in the U.S. has a term of 30 years. For land loans, your term may only be 10 years, which could limit how much you can borrow.
Lending limits are lower as well. Land is less expensive than a mortgage, but you will need to find out your lending limit to figure out if you can afford to purchase a property.
Section 502 direct loans
Section 502 direct loans is a program offered by, the U.S. Department of Agriculture. The program is intended for low-income borrowers who purchase rural land with plans of constructing a house on the property.
One advantage to land loans is that it is sometimes possible to finance through the owner of the property. You need to find an owner who wants to sell, of course. If you have vacationed in the area or know it, ask around to find out if there are parcels available for sale from owners.
There are two types of owner finance land:
1) contract for deed and
2) mortgage/trust deed.
Contract for deed
With a contract for deed (also termed a “land installment contract”), you pay the owner in installments for a length of time you mutually agree on. Often, a balloon payment at the end is required. A balloon payment is a large payment made at the end of the loan’s term. .
With a contract for deed, the seller keeps the deed to the parcel of land throughout the payment process. That means that he or she retains legal ownership, even though you may be building or residing on the property. The deed is transferred at the end of the contract for deed, which means it becomes yours.
If you negotiate a contract for deed, be aware of the potential downside. If you become unable to make payments, the owner already owns the property. You can be asked to leave the property and have no way to fight it, as you have no legal rights to it. You will not necessarily even get the money you’ve paid back unless you negotiated that into the contract.
The contract for deed route does have a positive side, though. It may be easier to get than a land loan if you have poor or average credit. While credit scores of 500-649 are considered poor, scores of 650-699 are fair or average.
This option is sometimes termed a “deed of trust.” In this financing option, the seller issues a deed to you. In exchange, you sign a promissory note and mortgage contract. The promissory note acts as a promise of payment to the seller. The mortgage is collateral for the note.
The main advantage is the seller does not own the land. The downside is that a third party lender must agree to make the mortgage, so it is not only between you and the seller.
If you approach a bank or credit union, they will want a loan application package. You will need to provide your work history, salary, and credit score.
It is likely a seller will want to see a loan application package as well. It may be less formalized, but sellers will want to see your ability to repay. Their terms might be easier to meet but sellers will usually want your work history, salary, and credit score.
Both lenders and sellers will want to know what you plan to do with the property before they agree to the sale. Building a house? A business? Plan to vacation in the wild?
It’s always best to get options from several different lenders. Compare the interest rates being offered. The annual percentage rate (APR) and the loan’s term will determine how much your monthly payments will be.
Compare fees as well. You may be charged a loan origination fee, a title fee, and an assessor’s fee for land loans. Look carefully at all costs you’re being charged to make sure you understand the actual cost of the loan.
Buying raw land
Land that is unimproved in any way is referred to as raw land. Improvements include access to the local water system, gas, electricity, a sewer system, and cell towers.
It is illegal in most areas to build in locations without potable water and a sewage system because it constitutes a health hazard. It may be illegal to be without heat and hot water also.
Before buying raw land, you should check with local government authorities to see how the property is zoned. Not all land is zoned for building. If it isn’t, you will be unable to build.
Even if you do not plan to build on your land, you need to determine the zoning so that you can evaluate its potential resale value. If you can’t build on the land, its resale value will be lower, since fewer people will want it.
Finally, you need to contact an assessor and a surveyor. With raw land, you need to have a clear picture of what your parcel entails and where the boundaries are, in case of disputes with neighbors or local authorities.
Buying land is an adventure! It is also complicated. Be sure to compare options among several different lenders.