If you’ve ever bought a home, you know the process of getting a mortgage. But what if you want to buy land? Is the process the same?
Whether for hunting, fishing, starting a hobby farm or building your own home, buying land actually works a little differently than buying a standard home. Let’s take a look at what makes it stand out.
Land loans are considered riskier
Kyle Wright, Financial Services Officer at GreenStone Farm Credit Services, says that when you apply for a land loan, you must provide the same financial information as you would with a traditional mortgage. The big difference is in the underwriting.
“On a mortgage, the house is used as collateral, but there is no home on a vacant lot,” he said. “If a person owns a house in the city but also owns 10 acres of hunting land, he / she would likely stop paying the land first if financial problems arise, so these loans are seen as a higher risk.”
When a lender needs to take out a home loan, there is no guarantee that the money will be recovered. Vacant land is often more difficult to sell because there is less demand for it. With this fact in mind, it is easy to see why a land loan would require higher credit, lower debt-to-income ratios, and a higher down payment than a traditional mortgage. These loans also usually come with slightly higher interest rates than traditional home finance options.
“At GreenStone, we look at the potential purchase, what type of specialty funding is required and how it fits in with the overall financial picture of the individual,” said Wright. “For purchases with acreage, the majority of our offer requires a down payment of 20 percent. But we can use different methods to get that 20 percent and we work one-on-one with our customers to remove any obstacles we might encounter. “
There are a few other differences
As mentioned earlier, when buying a rural property, a lender will collect your financial data just like they would a normal home loan. They also require assessment and of course title work needs to be done.
Unlike a standard mortgage, however, lenders do not require you to purchase vacant land insurance and typically do not require any inspections or surveys. However, Wright recommends examining lots of 10 acres or less so buyers have a good understanding of their property boundaries. For more information on specific land assessments, inspections, or environmental reviews, Wright suggests consulting a REALTOR®.
“An experienced agent will know what is needed in each community and is likely to suggest additional assessments if necessary,” he said. “I had a client who was financing a property and REALTOR® suggested a land valuation of the property. After the evaluation was completed, items were identified in the countryside that needed to be rehabilitated. Ultimately, it did not suit the buyer and his intended use. Without REALTOR® suggesting this evaluation, the buyer could very well have bought land that is not suitable for him. “
It’s a niche market
While there are a variety of credit institutions that can offer vacant land, working with a lender who specializes in this area has advantages.
“Some banks or credit unions offer vacant lots, but my clients have found they have shorter terms, balloon payments, higher down payment requirements, or even time constraints to build a home,” Wright said. “GreenStone offers a fixed interest rate of up to 30 years for undeveloped land without the need to place structures on the property, which is quite unique in our industry.”
This specialty also means that GreenStone has a large network of experienced professionals inside and outside the company who can assist clients with their transactions.
“We have our own in-house valuation department and teams that provide accounting and tax services,” Wright said. “This enables GreenStone to offer our customers and potential customers specialized support in their search for a new hunting ground, a hobby farm or a home with space and thus create value, regardless of whether they are looking for financing with GreenStone or another lender in the market decide. “
There are many factors in determining the right home loan program, including the size of the property and how it will be used. Wright says anyone interested in buying land should schedule a consultation with an experienced lender.
“Perhaps we will find that a USDA loan is a better option for you, or it makes sense to get a one-year land contract,” he said. “Together we will discuss your financial situation, go through all available options and find the right solution, regardless of whether you are buying now or working towards your goal of future shopping.”
For a list of local service providers, see the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.