Land Loans

Purchasing land is a whole different experience than purchasing a home- especially when it comes time to go to the bank. Borrowing a loan to cover the cost of land requires some different terms and conditions than a simple home loan or mortgage. A large part of the way the loan process will work depends on what type of land you're purchasing and what you're planning to use it for.

First of all, you must understand that when you borrow money for land the terms of the loan are going to be stricter. That is because land is a riskier investment for the lender than a home or other type of property loan would be. Because the land being purchased is not yet in use, it's much easier for a borrower to change his mind and walk out on the deal. So expect to be working with naturally higher interest charges, down payments, and account fees. If you're planning on purchasing unimproved land, with no buildings, alterations, or developments, you may be required to pay as much as 50% of the cost as a down payment.

So what type of loan should you look for? The first place many people head is towards a land loan, which typically has a 10-15 year maturity. The interest on the loan may be tax deductible, depending on what you plan to use the land for once it is yours. A land loan is what is referred to as a story loan, meaning the person or company making the loan is required to be aware of the story behind the property and your intentions for it before they can lend to you. The uses of the property will also be reflected in the type of rates and down payments you are required to pay.

Because of the higher interest rates and exceptional requirements of a land loan, you may be better off coming up with the cash to purchase your land, if possible. One good method is to take out another loan with a lower interest rate and use that money for the purchase of your land, and then pay off the more reasonable loan at your own pace. Consider taking out a home equity loan, if you can, or refinancing your mortgage to receive cash out, and then use that money for your land purchase. The terms on a home equity loan or refinanced mortgage will naturally be lower than those of a land loan, because you're no longer borrowing against undeveloped property. Also, in this instance your home will be acting as collateral on the advancement, which means the bank is more likely to lend you what you need without charging you extremely high rates.