If you're thinking about buying land for your home or business, chances are you're wondering about how to get financing for your purchase. So let’s deep-dive into some ideas on how you can approach this!
The best thing to do is to plan ahead before you decide to buy land. Once you spotted a plot of land that fits your interest and needs, you want to ensure the price is right.
For properties that you need financing for, you'll probably want to hire an appraiser to come up with an accurate value for the land, since that will be used when determining how much money you can borrow from a bank or lender.
If the land you are planning on purchasing has relatively low price and you intend to take a seller financing (most cases no credit report will be required), you can do your own due diligence on your land by taking some recently sold comparable properties from the region to determine the current market value to be sure you are making a good deal. Make sure to check our blog for more details on the due diligence process!
Let’s have a look at what financing options are out there.
Land financing options
Whether you are buying land to build your dream home or simply looking to invest, having the right financing is key.
In general it's harder to get a loan for land because land loans are different from traditional mortgages. That said there are several options available that you need to consider before deciding. That financing might come from a number of sources.
1. Land or lot loan
If you are planning to build a home or use it for business purposes in the near future (e.g. within 1 year), this would be the most fitting option to go for. Land loans can be long-term or short-term loans, and they aren't always easy to get.
2. Construction loan
Meant for immediate planning to start building immediately. If you're planning on building a home, it's best to consult with home manufacturers who have experience with both loans and construction. You'll need to apply for a loan secured by land and provide information about the property you are planning to build. Here the manufacturer will help you to have everything planned and ready for construction to be able to start immediately after you get your loan.
Getting a loan from a lender
If you decide to take a land or construction loan from a lender, some additional steps will be required.
Work with a local lender who knows the area. A reputable lender will want to see that you have some credit history and income. If you have bad credit, it can be difficult to get a loan. You will need to gather information and proof that you are able to take on a loan to purchase land.
You don’t always need a specific amount of cash down, but you need to be able to prove that you can make the payments. You will need to gather information and proof that you are able to take on a loan to purchase land. Get a copy of your credit report and make sure it's accurate.
If you are not willing to put a high down payment, compare your options and check around with other banks or mortgage companies that may not have as high a standard on a down payment.
3. Seller financing
You may be able to get financing for your land without even seeing a bank! Make a proposal to the owner stating why they should let you finance the property through them. Ask the owner what terms they are willing to accept and see if those terms would be enough to get you approved. The good news is that the seller is interested in keeping the process less formal and will most likely opt out of checking your credit history which will make the financing transaction much faster and save you lots of time and effort. The sale agreement will contain the down payment and outstanding payments, their frequency and total duration. Once the property has been paid out, the seller will initiate the title transfer to you.
Small tip here, compare your options and find out what interest rates you qualify for from a bank before you attempt to get financing from the land owner. Also, most seller financiers allow you to pay back the loan early without penalty. Make sure to have that options in the paperwork as it would give you the possibility to secure a low monthly payment and enable you to move forward once you have everything in place.
4. Personal loan
The personal loan can be a good option for those looking for a long-term loan with flexible repayment options.
The interest rate is usually higher than other types of loans and the credit limit is smaller, too. But if you have good credit or an established relationship with your bank, it’s worth considering.
Personal loans are available from both banks and credit unions, as well as some online lenders. The terms vary widely among lenders, so make sure you shop around for the best deal.
What is a personal loan?
A personal loan is a type of unsecured loan that allows you to borrow money without putting up collateral. You may have heard them called signature loans, signature lines of credit or signature loans as well.
Personal loans are typically unsecured because they are paid off over time, unlike secured loans (like mortgages) where the lender gets the right to repossess something if you don’t repay the debt.
Unlike unsecured credit card debt (which carries high interest rates), personal loans typically carry lower interest rates and longer repayment periods than credit cards.
Fixed payments: You know exactly how much you'll have to pay each month until the loan is paid off (usually after five years).
Once you identified the best way to finance your land, proceed to perform your due diligence on your dream land.