written by: wendyppp•edited by: Elizabeth Wistrom•updated: 6/29/2011
People purchase land for a number of reasons. Some people like the investment potential that it offers. Others want to build a custom home instead of buying a cookie cutter home in a subdivision. Whatever the reason, financing a land purchase doesn't need to be confusing.
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More and more people are looking to finance a land purchase, whether they want to build a home that is completely unique or they just want the land as an investment. Unlike a mortgage however, financing a land purchase can be harder and require more money from the buyer than a mortgage on an existing home, which in the current financial climate, are extremely competitive. But don’t lose heart. There are ways to finance your property; you will just need to do some leg work.
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Cash is King
The most obvious way to finance a land purchase is with good old fashioned cash. Cash purchases are really the most simple and straightforward way to purchase your property. If you have some assets that you can liquidate without too much hardship, then in the long run this option would be better for you than bank financing, simply because you won’t be paying interest to the bank and your property will appreciate in value.
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The next, and quite common, option of financing a land purchase is the seller carried financing option. This means that the seller of the property requires a small down payment, usually smaller than what a bank will require, and then the seller will carry the financing for the property. The interest rate with this option can vary a little bit and it’s not uncommon to find it higher than what a bank would charge. However, you also have the ability to negotiate terms a bit more freely with an individual seller than you do with a bank. So this could be a perfect option if you don’t have a lot to put down on the property.
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Finally there is bank financing. If you are going to be financing a land purchase through a bank, you will need to have a lot of information in order before approaching the bank. Many banks will want to see a plan for what you plan to do with the land, soil sample tests, zoning restrictions etc. before they will even look at financing you.
When looking to a bank for financing, you need to look local. Large national banks have little interest in financing the purchase of your ½ acre city lot to build your home. They deal primarily with mortgaging existing homes. Small local banks, on the other hand, usually have a vested interest in the community that they serve. Therefore, as long as you have all the required information, they are more willing to help.
Bank financing will require a larger down payment than the other options we discussed, anywhere from 20-50%. They will also likely have higher interest rates as well because financing a land purchase poses a higher risk to the bank. Often they will finance the land under the condition that you plan to build a home on the property within a set amount of time and often they will provide you with a construction loan as well if you ask for it and have the credit to justify it. Once your construction is completed, everything will be rolled into a traditional mortgage at a lower interest rate. It also helps if you already do business with that specific bank. That way they will be able to see that you are a loyal customer with a good track record and often a bank manager will give you the loan if they know you will keep doing business with them in the future.
While cash is king when financing a land purchase, there are plenty of options out there, you just have to be willing to do some research and have patience.