Getting a lender to finance a parcel of land you want to buy can be more difficult than financing a home. Usually, you will have an easier time getting a loan if you have plans to immediately start building on the site. Otherwise, unlike buying a home for which lenders offer a wide variety of mortgage loans, fewer options are available for financing the purchase of land. Land is an investment and it's important to consider your financing choices.
Apply for a construction loan if you are going to build a home on the land. Figure the cost of the land into the loan amount. A lender will want to see your building plans, a construction contract and cost estimate before considering you for a loan.
Check out the rates at your credit union and smaller, local banks first. You may have a better chance of getting financing with a lender who knows the area and may even be familiar with the land you want to buy. Homes recently constructed on surrounding properties also can increase your chances to get a loan. Unless the land has improvements such as utility lines, sewer systems and streets, most lenders charge a higher interest rate even if they approve the loan.
Prepare to make a down payment of 20 percent to 30 percent of the land and construction costs combined. If you are financing the land alone without any immediate plans to build a home there, a lender may ask for as much as 50 percent down. Lenders consider financing a parcel of land more risky since they have a harder time selling land than they do homes if you default on the loan and the bank forecloses. But if you invest more money from the start, a lender may consider you less likely to walk away.
Take out a home equity loan to secure the financing to buy the land. Because you will be using your existing home as collateral for the loan, the lender takes on less risk. As a result, you may qualify to get a lower interest rate. In addition, you may be able to deduct the interest you pay on a home equity loan on your federal income taxes.
Apply for a cash-out mortgage refinance loan. As long as you have enough equity in your current home, this gives you the cash you need to buy the land. Shop lenders to get the best terms and refinance at a lower interest rate.
Ask the sellers if they would consider owner financing. Like a mortgage lender, the property owner might require a down payment and then hold the note. You then make monthly payments to the seller. A seller normally agrees to an amortization period of 10, 15 or 20 years, often with a balloon payment due at the end of a 3- to 5-year period. Both you and the seller sign a promissory note detailing the terms of the loan.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.