If you are interested in acquiring land you might have difficulties convincing a mortgage lender to finance your investment, however, you can apply for a land loan. This type of loan isn’t very common and most people aren’t even aware they exist.
A land loan is a sort of credit that is used only to buy a piece of land. It can either be for the purpose of building a home, or simply for investment. You don’t necessarily have to develop it. These loans are riskier than a mortgage for the lender because the landowner might stop making the payments if he finds himself in a bad financial situation. This is why the land loan rates are higher and come with not so favorable terms for the borrower.
So if you are on the market for making a land purchase, you should know about this option and what’s it all about. Here are the options you have to finance a land purchase with a land loan.
1. USDA Rural Housing Site Loan
This option is mainly available to you if you plan to build your primary home in a rural area. The Department of Agriculture offers two kinds of loans. The section 523 loan, which is for someone who plans to build his own home, and the section 524 loan, which is for someone who plans to hire a contractor instead. Both of these loans are mainly for people with families that earn a low to moderate living. These loans can be great because of the low-interest rate. For example, if you build your own home with a USDA loan, you may have to pay a measly 3% rate. However, you should be aware that the loan needs to be repaid within two years.
2. Lender Land Loan
National banks aren’t very likely to offer you a land loan. However, you can go to your local community bank or credit union instead. Your best chance for such a loan is by going to the bank or credit union that is in the same area where you are looking to buy the land. If they know the area, they will also know the potential of the piece of land you want to buy. Keep in mind though that if you don’t plan to develop the land, your down payment will be huge, up to 50% of the total value. This is because land is much more difficult to resell. Most people are on the market for a home, so banks and credit unions don’t like to take the risk when it comes to raw land.
3. Seller Financing
You might be in luck and the seller of the land might offer you short term financing. However, these people aren’t lenders and have very little experience in this area so they won’t take risks. You are likely to receive a high interest rate with a big down payment on top of it. The seller doesn’t have the same backing as a credit union. Take this option into consideration only if you can’t apply for any other loan.