Acquiring land can require an impressive investment. Depending on its intended use, various loan options may be required for its acquisition.
Land loans typically come from specialty lenders or government programs with stringent eligibility requirements that typically include an excellent credit score and down payment amount.
1. Home Equity Loan
Home equity loans (or second mortgages) provide an effective and simple means of tapping your property’s equity as collateral for lending money. Unlike home equity lines of credit which offer access to revolving credit lines, this form of loan offers fixed monthly payments over its life.
Your equity in your home is calculated as the difference between its current market value and what you owe on its mortgage loan. Your home’s location, community, renovations or changes made to it all determine how much equity is in it for you.
Before using a home equity loan to buy raw land, it’s essential that you carefully assess all associated risks. Be sure to factor in all expenses such as property taxes, maintenance and improvements as well as potential co-signer requirements or proof of income in order to qualify for such loans and compare interest rates across several lenders before making your final choice.
2. Government-Sponsored Loans
Similar to mortgages, land loans are secured against real estate and can take ownership of your property if payments aren’t made on time. However, their terms vary significantly and they may be harder to secure.
Lenders will perform an in-depth evaluation of your income via pay stubs and tax returns, source of funds analysis, property evaluation and verification that there is enough money for down payments and payments. They may also require zoning reviews, land surveys or appraisals as additional assessments.
Land loans may not be as widespread as home mortgages, but you can still find lenders offering them. Community banks and credit unions typically have land lending programs as do local lenders familiar with financing vacant land in your area. Or you could look for specialty lenders who specialize specifically in land loans.
3. Private Lenders
Private lenders are an excellent way to finance land investment properties. Their lending policies tend to be more accommodating and they may provide larger loan amounts than traditional mortgage loans.
When selecting a private lender, take note of their reputation and track record. Also ensure they can offer asset-based financing solutions and find out their approach to customer relationships – they should value relationships while being responsive.
Some private lenders specialize exclusively in real estate while others are more diverse, offering loans for fix and flip loans, commercial or residential property that is ineligible for conventional mortgages, or offering shorter loan terms than banks would, making financing much faster and with significantly less paperwork requirements.
4. Seller Financing
Seller financing could be the perfect solution if you want to sidestep mortgage qualification issues, aren’t ready for traditional closing procedures, or prefer more flexible repayment terms. Also known as land contract financing, seller financing entails entering an agreement between you and the property owner that defers legal title until all purchases have been fully paid off.
Common arrangements involve you making an initial down payment followed by equal monthly installments plus a portion of interest charged on the loan. Other variations include all-inclusive mortgages, rent-to-own agreements, second or junior mortgages and wraparound agreements.
Seller financing has long been used by real estate professionals as an effective way to purchase properties beyond your reach. But this comes with its own risks; to mitigate yours and the seller’s, we advise hiring an attorney, making a substantial down payment, and potentially selling your promissory note in order to lower risks associated with seller financing.