When it comes to buying land, lenders are much more skeptical about loaning money than they are on homes and brick and mortar. If a lender has to foreclose on a land loan, the guarantee that they will recover the borrowed money is low. In the case of a borrower having a financial crisis, it is much more likely that they will stop making payments on a piece of land versus their home or business. Vacant land is much more difficult to sell than property with a home on it. People typically want to buy property with a structure already built on it. When you look at the reality of it, it’s easy to see why land loans are not only harder to get, their terms are much less-favorable than mortgage loans.
Large national banks are the least likely to offer land loans than any other lender. If you want to stay with a traditional lender, working with a credit union that is near the land you want to buy gives you a better chance of receiving a loan. Local financial institutions will know the area better making it easier for them to assess the value of the land and the potential it holds. Generally, a traditional lender will require a minimum of 50% down for a land loan. There are other options, such as a home equity loan or seller financing, also.
If you have an existing property that holds significant equity, you may look into getting a home equity loan. Benefits of a home equity loan are no down payment and lower interest rates, because your property secures the loan. With those benefits comes a considerable downside. If you default on the loan, you will lose your home. And, if you are not using the land to build or improve the home you are using to secure the loan, your interest is not tax-deductible. There are times when the person selling the land will offer short-term financing to the buyer. Because the seller is not a financial institution, you will pay a large down payment and high interest rates. This is generally a last resort for buyers.
The above options won’t work for most buyers searching for a land loan. Another option for a land loan is a hard money loan. A hard money loanis a type of asset-based loan financing where a borrower receives funds that are secured by real estate. Generally, hard money loans are taken out for between 6 months and 3 years. A hard money lender is either an individual or a lending company. These lenders are also investors. They will utilize all types of collateral such as residential properties, commercial properties and vacant land. Most hard money lenders can work with borrowers in search of a land loan. There are certain hard money loans, especially residential loans, that can be financed with zero down. However, because of the high-risk associated with land loans, even hard money lenders will require some type of down payment.
There are many options when it comes to land loans. However, most will require a large down payment or a property with a sizeable amount of collateral invested. A hard money lender will often work for borrowers that don’t fit into those categories.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.