Securing the loan for a land purchase is sometimes more complex than securing a mortgage. Financing land can be risky business for some lenders, but understanding what you may be up against before you apply for a loan will help you cut through the red tape quickly. Below you will find practical advice for securing a land loan and also learn of some interesting alternatives that may help you achieve your goals of land ownership.
Instructions
Finance a Land Loan
1. Order copies of your credit report. Your lender will use your credit history to determine whether you are a good or bad credit risk. A credit report with derogatory information such as collection accounts or credit charge-offs, will negatively affect how you’re viewed by lenders. Reconcile any collection accounts you may have, regardless of how old they are. Negative information remains on a credit report for at least seven years and even though paying these accounts will not remove them from your report, lenders may be more willing to assist you if you can show proof that you’ve paid your debts.Credit reports that reveal problems with credit card accounts, such as late payments or exceeded credit limits, will seriously affect your ability to finance a land loan. Pay your credit card payments before they’re due and try to keep the balances down to less than 50 percent of your credit limit. Lenders will often determine how responsible you may be with credit by taking a look at your credit card balances versus your credit limits. A high ratio of used to available credit may send up a red flag to lenders that you may not be responsible enough with money to be considered a good risk.
2. Save a sizeable payment. Depending on the land you intend to purchase and what you plan to do with it, your down payment may be as little as 20 percent or as high as 50 percent. Raw land without any improvements and for which you have no immediate plans, will require a larger down payment and a higher interest rate to secure a loan. Many lenders feel that land that is unimproved may be easy to walk away from when you’re in a financial bind. The more money you have to put down on your loan, the more likely you are to obtain financing because lenders want it to be difficult for you to walk away from the property. If you have a lot of money already invested in your land, you’ll be less likely to default on your loan payment. If you have immediate plans to develop your land, you may be able to place a much smaller down payment on the property. For example, if you plan to build a house on the property, lenders may be able to help you based on the fact that the land will be paid for after you’ve secured a mortgage for your new home.
3. Speak with a lender to discuss your options. A lender will require quite a bit of your financial information to be able to make a decision about your loan and suggest programs that are right for you. Have the required documents ready before you meet with the loan officer to make the process easier. The more prepared you are when meeting with an officer; the more likely you are to receive a timely answer.
4. Don’t worry if your loan request is denied. There are a lot of options available to you if you are unable to secure traditional financing.
5. Obtain a home equity or a cash-out refinance loan on your current mortgage. If you have enough equity built up in your home, you may be able to cash it out and use the funds to purchase land. Talk to your lender about the options available to you to help you tap in to the equity in your home.
6. Contact the seller and inquire about his or her willingness to provide you with owner financing. If the seller agrees to finance the land for you, you’ll be able to secure the property and instead of paying a lender, you’ll pay the seller a monthly payment with interest until you can obtain other financing arrangements. A seller may be willing to help you if he or she is not in an immediate need to sell the property outright or if the extra money from the added interest is appealing enough.
7. Discuss the possibility of a lease option with the seller if he or she is unwilling to provide owner financing for you. A lease with an option to purchase means that you agree to lease the property for a predetermined amount of time and when that time is up, you will be given the option to purchase it. This will give you time to save your down payment and improve your credit rating before you apply for a land loan the next time.
Tips & Warnings
- If you’re turned down by one lender, try a few others. You may find that some lending institution policies may not be as strict and you can obtain financing easily from another company.
- To estmiate your land loan monthly payment, visit the resource below.
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