Buying land, at least in our opinion, is one of the most valuable investments on the planet. When it comes to buying real estate in general, it is usually a great place to put your money. However, there are some differences between buying land, and buying an existing home on a lot. Land loans are pretty different compared to traditional mortgages, and being aware of these differences is important—especially as you set your budget and determine what you can afford.
Below, we will take a look at the major differences between land loans and home mortgages, as well as popular options for financing your land purchase. Let’s take a look.
What is the biggest difference?
While it’s true that financing a house can come with plenty of hurdles, land investors often find that there’s a whole different set of hoops that have to be jumped through in order to secure funding for their purchase.
There are a couple of reasons for this:
1. Land loans are considered riskier for lenders.
Land—and vacant land in particular—doesn’t usually have a lot of financial appeal for banks. Aside from the fact that there’s no physical structure to act as collateral, there’s also a pre-conception that because the borrower isn’t living on the land they won’t consider it a top priority if finances get tight.
2. Land loans typically come with higher interest rates.
As you might expect, higher risk means higher interest rates. And while an added 1% or 2% in interest might not seem like much when you’re borrowing, it can add up fast over the course of your loan.
3. Land loans typically come with less favorable terms.
Speaking of the course of your land loan, expect a shorter payback period than you’d get with a traditional mortgage. Some lenders do offer 30-year loans for land just as you can get for a house, but it’s not uncommon to come across lenders that cap their land loans at a five- or ten-year payback period.
Land Loan Financing Options:
It’s likely going to take a bit of research to figure out what your best option is for financing a land purchase, but you’re not totally on your own if big banks aren’t interested.
Here are some other options:
FSA Loans
If you’re buying land for agricultural purposes, you may be able to score a subsidized loan through the USDA Farm Service Agency’s Farm Loan Program. Known as FSA loans, these offer favorable rates and minimal requirements for those who qualify.
Seller Finance
Some sellers are willing to work with buyers directly on financing. If you go this route, make sure to get an attorney involved so you can ensure the contract is favorable (and air tight).
Home Equity Loan
Land buyers with existing properties can use equity from current lines of credit to purchase land, and often with pretty favorable rates.
Smaller Banks
Your local bank might be more interested in taking on a land loan than the bigger guys. Just be ready to pitch your plans much like you would for a business, with a clear outline of how you intend to use the land and how it will enable you to pay back what you borrow.
Your best option for a land loan might not always be the most direct one. Work with a financial advisor to navigate what’s available, and consider that you’ll probably want to have more cash on hand for buying land than you would for buying a house.