Getting financing for the purchase of raw land is the most difficult loan to get.
Buying raw land that has no improvements and getting a mortgage to finance your purchase requires an approach that is different than if you're buying a house. The most direct line of action is found in the locality of the land, meaning lenders and credit sources that know the area and are used to lending locally. Most major national financing institutions do not get involved in land loans. Begin your financing search by preparing your portfolio to include information a lender requests before considering a purchase loan, knowing that financing for raw land is the most difficult of loans to get.
1
Identify the land you wish to purchase and then contact the local governmental agencies to determine the zoning of the property. Get a recent land survey from the seller or hire a professional to develop one for you, as easements and access are vital to the value of the land. Contact the utility companies servicing the area the land is on and get an approximate price to install gas, electricity, water and the sewage systems necessary. Put all this information into your land portfolio.
2
Get a survey and any flood or hazard reports that are available regarding the land. Determine if a sales trailer or mobile home can be erected during the construction phase by speaking with your local zoning office.
3
Hire an architect to do a rough drawing of any improvements you wish to add to the land. Include the full architectural fees in your land portfolio. Speak with a general contractor to get a rough estimate of building costs, and include them as well.
4
Present your land portfolio to a local loan officer, together with your personal credit information to substantiate qualifying for a loan. The loan you are asking for is known as a “story loan” because its approval depends on the story you’ve developed as to why the lender should consider your purchase and plans.
5
Ask the owner if he’ll finance your purchase. Consider offering a substantial down payment with the offer, and show the owner your building plans and your schedule of completion. Most seller-financed land purchases are short-term and are replaced by a conventional mortgage loan when the building is complete.
Tip
- Insist on a warranty deed and clear title to the land at closing.
- Expect to pay a down payment of between 20 and 50 percent when applying for a land loan.
- It may be possible to get a home equity loan on property you already own to finance the purchase of the raw land. There isn’t any risk to the lender, as the loan is secured by your developed real estate; the interest rate on an equity loan is typically higher than that of a conventional loan, but lower than that of a land loan.
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JUSTIN LEE THAYER
