Vacant Land Financing
If you’re like me you probably yawned a little just thinking about reading an article on financing – but I promise, what’s in this article is worth knowing about if you are looking to buy vacant land and need a little help to do so.
While there are a number of ways to finance vacant land, below are the most favorable options to finance vacant land:
Option 1: Acquisition Financing – Traditional Lenders
This is the toughest financing option for vacant land because banks find these types of properties risky (i.e. if you default on mortgage payments, it is not as easy for them to turn around and sell it). Most of the time their lending criteria will depend on variables like: how soon you plan to build on the land, the legal zoning, if there is an existing structure on the land (like a dilapidated old barn or home) that needs to be demolished and if there are any restrictions to use on the land.
What down payment are you looking at with this type of financing?
It’s possible to get up to 80% of the price of the land financed, BUT most traditional lenders only give you 50% of the price – leaving you to come up with the rest (50%) for your down payment.
Land Cost $200,000
Bank Lend { @ 50%} $100,000
Down Payment Needed $100,000
What are interest rates like on this type of property?
Most lenders will lend at a high interest rate. You are probably looking at between 4 – 5% on the amount they lend you.
You could look into Private Lending or your home’s equity (in the form of a HELOC – Home Equity Line of Credit) or Joint Venturing with partners as options to help you with your down payment if you don’t have the cash readily available.
Option 2: Home Equity Line Of Credit (HELOC)
Here, you would be borrowing money from yourself (or the equity you have in your existing home).
If you do have enough equity in your existing home, this could be a great option for financing most or even all of the land yourself. This would be ideal given that you would not have to pay as high an interest rate as you would on lender borrowed money.
As mentioned above, most times people will use a portion of their equity towards the down payment, with the lender financing the rest of the project.
Option 3: Vendor / Seller Take Back
As the name suggests, the Seller would essentially finance the purchase of his/her property with you paying back the seller a “mortgage” for their land.
In the last few years though, we haven’t seen many Sellers offering this. When it does happen, the seller will have his/her own terms for the loan when it comes to interest rates and the amount they are willing to loan you. These terms will likely vary depending on you as an individual, your financial situation and of course the price of the land (i.e. the more expensive the land the tougher the terms may be).
The most common interaction seen in a Vendor / Seller Take Back situation involves the Seller agreeing to help-out with a portion of your down payment after you have already secured financing from a traditional lender, HELOC or private lender.
Land Cost $200,000
Bank Lend { @ 50%} $100,000
Seller Lends $70,000
Down Payment Needed $30,000
What about financing the build of the home?
Option 1: Construction Loans – With Traditional Lenders
In this circumstance, the lender is likely going to loan you up to 80% of
EITHER
- i) The Appraised Value of the Completed Project
OR
- ii) The Cost To Construct + Land Value
WHICHEVER IS LESS
Leaving you to come up with 20% of the down payment.
What are interest rates like for this type of financing?
Interest rates are usually at 4% for this type of loan.
Be warned, these lenders require a lot of paperwork from you. The list is too long for this article – if you’d like more information email us and we can send it to you or put you in touch with a professional mortgage broker to explain in more detail.
The loan is usually given out in draws or advances at particular phases of construction – the amount usually varies depending on what the builder needs at the time. Here is a simplistic example of what construction might look like.
Option 2: Construction Loans – With Non-Traditional Lenders.
Usually obtained through B Lenders or Private Financing. Where the land loan given may be up to 75% for
EITHER
The Purchase Price of the Land
OR
The Appraised Value of the land
WHICHEVER IS LESS
However, it may be possible to have 100% of the hard construction costs (e.g.: grading, excavation, materials, building) financed. With you personally covering the soft costs (e.g. architectural drawings, legal fees, taxes, permits, etc.).
What are interest rates like?
Interest rates are high, usually around 7-8% (possibly more) and fees at about 2 – 4% will need to be paid as well.
However, there is less paperwork when borrowing from these lenders and you may have an easier time getting financing through a non-traditional lender.
A Note on Take Out Financing
This type of financing generally works in tandem with Construction Loans as discussed above. Allowing for a final mortgage to be given at the end of the project that pays out all previous construction financing, leaving you with affordable monthly payments.
This is a basic example of how it might work:
You obtain a construction loan of $600,000 from Bank A to pay for the purchase of the property as well as the cost to construct your home with an interest rate of 8%.
Once construction is completed, you get a loan from Bank B with a 25-year term (similar to a regular mortgage). Bank B is more willing to lend as they now have collateral in both the property and the newly built home. You use this loan to pay off / take-out the original loan from Bank A. You may Bank B in monthly payments of principle + interest as you would any other mortgage.
Important: Get yourself a good mortgage broker! Financing is a complex beast and you should sit down with a mortgage broker to go over your options. Each person’s credit and financial situations vary, not all options or scenarios are available to everyone.
