For some home buyers, a land purchase is the best option. It ensures you get the location you want and the ability to build the home of your dreams. However, unlike buying a home, you cannot simply take out a mortgage for land. Instead, you’ll need a land loan.
What is a Land Loan?
Lands loans are used to finance the purchase of a vacant lot, acreage or parcel of land in the Adirondacks. These types of loans make up a very small percent of the lending market, and there are fewer options for lenders, mainly because it’s a riskier investment than a mortgage loan. Not only is it difficult for a lender to determine the value of land without a property on it, but buyers are more likely to walk away from vacant land and default on payments. If that happens, it’s much harder for the lender to sell that property and get their money back without a structure on it.
As a result, construction loans tend to require a substantial down payment. They are also more likely to have higher interest rates and shorter repayment terms than the typical 15-year or 30-year mortgage.
How Do Land Loans Work?
Although the terms of a land loan differ from a traditional mortgage, the application process is pretty similar, as is obtaining the funds. You will be required to provide documentation of income and the lender will perform a check of your credit history. You may also need to present a loan package with specs and plans for the land. In most cases, you’ll be asked for a down payment, and then expected to pay the balance back with interest over a pre-determined period of time, usually on a monthly loan payment schedule. However, a land loan from a bank isn’t your only option for financing.
Types of Land Loans
In addition to bank lenders, you have four options when it comes to financing a purchase of land for residential use, including USDA rural housing loans, seller financing and home equity loans.
1. Community Banks and Credit Unions
Local financial institutions are more likely to offer land loans than national banks, simply because local lenders know the area and are better equipped to assess the value of the land and its potential.
If you’re working with an Adirondack real estate agent, he or she may be able to recommend a specific bank, since we have a wider net for finding lenders. Likewise, if you’re already working with a builder, they be able to make recommendations.
2. USDA Rural Housing Site Loans
If you’re purchasing land in a rural area to build a primary residence, you may qualify for a U.S. Department of Agriculture loan. Section 523 Loans are for borrowers who intend to build their own home, while Section 524 Loans are for borrowers who plan to hire a contractor to build their home.
Both of these loans are designed for low to moderate income families, so interest rates tend to be low and no down payment options are available for those who qualify. However, the repayment term is just two years.
3. Seller Financing
In some cases, the person selling the land may be willing to offer financing, especially if they are eager to unload the land. Since this is a contract between two private citizens, everything from the down payment to the interest rate and repayment terms are negotiable, but you’ll definitely want an attorney to provide guidance and review the agreement before signing.
4. Home Equity Loans
If you already own a home on another plot of land, you can take out a home equity loan to purchase the land outright. In most cases, you can borrow up to 85% of your home value, and there’s no down payment required. Repayment periods vary from five to 30 years. Plus, you can usually get a low interest rate because your home secures the loan. However, the interest you pay is not tax-deductible, and if you default on the loan, you could lose your house.
Can a Land Loan Be Used to Pay for Construction?
If you’re looking for a loan to buy land and fund your construction, you’ll need a construction loan. Unlike a land loan or a mortgage, construction loans are short term loans, typically 12 months or less, during which time the property must be built and a certificate of occupancy issued.
Rather than lending the entire balance of the loan all at once, a construction loan pays you or the builder/contractor in installments, called “draws” throughout the construction project based on a pre-determined timeline. Once your new home is complete, the loan is either paid off with a new loan or converted into a “permanent” loan, which works like a traditional mortgage with principal and interest payments.
Interested in Buying Land in the Adirondacks?
If you’re looking for a plot of land in the Adirondacks that’s ready to build – zoned properly and already has utilities – I not only have the inside lead on those parcels of land, but I’m often able to recommend a local land loan lender, a real estate attorney and any other vendors you might need.
To search properties for sale in Lake George, Bolton Landing and the surrounding Adirondacks, please go to my Property Listings and select type: “vacant land” from the dropdown menu, or give me a call me at (518) 321-1870.
You may also be interested in Buying Land in the Adirondacks: 3 Things You Need to Know.