Maybe it’s time to consider buying some land and starting over.
Borrowing Money for a Land Purchase
Strictly speaking, buying land is rarely done with a traditional mortgage. Instead, a commercial loan, in one of many forms, is utilized. From where you’re sitting, though, the two will look nearly identical. It all depends on what kind of land you’re buying and what it is that you intend to do with it. The kind of land that homeowners tend to choose will likely fall into one of these categories:
Raw land, that is, land without any major improvements like electricity, water, sewer or gas lines, is the most difficult to borrow against. The reason is simple: it’s generally pretty easy to walk away from this kind of property if you get tired of making payments or suddenly develop a serious allergy to oak trees. The bank’s left with a parcel of land that may take years to resell. It’s a big bummer for them.
Improved land has many or most of those above-listed improvements already installed on it. There may even be a potential building site already prepped and ready to go. It’s important to note that land that has a mobile home without a permanent foundation is also considered “improved.” Because mobile homes are considered personal property, that specific land configuration is still just a land transaction.
Home on an acreage. A permanent, safe and liveable home on an acreage is treated like a home sale, so you could theoretically buy a reasonable sized home on a small acreage using an FHA loan or a mansion on a hundred acres with a jumbo. It’s basically just a house with a really big yard. This is only the case for private homes, not for farms. That’s a whole other blog.
Examples of Loans Based on Land Usage
Again, the type of loan you may be able to secure depends heavily on the type of land and what you plan to do with it. Here are a couple of examples:
Example 1. You’re an avid bird watcher and want to buy an extremely rural, 40ish acre parcel to turn into your own personal campground and bird paradise. You don’t plan to add any utilities to the raw land.
This is the hardest of situations, which is why we started with it. Because an undeveloped piece of land like this is likely to have a smaller purchase point, your local bank may be willing to write a 10 or 15 year portfolio loan for for the buy, with the land as at least part of the collateral. You may need to bring as much as 50 percent down, however, to mitigate the risk you represent. Qualifying won’t be a cake walk, but if you have ample income and seem like a good risk, a local bank will loan to you at their own discretion. Same song applies to a credit union you may belong to.
Other options for financing your bird paradise include asking the owner to finance it (you’ll still need a downpayment, usually 10 percent is plenty) or borrowing against something else you have that has enough value. This might mean you’re taking out a home equity loan or borrowing against your retirement plan.
Example 2. That hall closet has finally driven you far enough out of your mind that you’re hatching a plan to build your own home, with the help of a professional contractor. As soon as the land is acquired, you’re going to start on the construction phase of your life.
This is the kind of land transaction that lenders like. Using the plans for that future home, the value of homes like it nearby and detailed information about the materials you want to use, your bank can determine a reasonable final value for your construction project. This is where they start when determining how much to loan out.
Usually, you have to bring 10 to 20 percent to the table at closing, but these types of land loans are considerably easier to get than a raw land loan. This type of loan usually starts out as a construction loan that you or your contractor can treat like a credit line, taking out money for specific parts of the project as you go. When it comes time to lay the tile in the house, you or the contractor need only request the funds that it takes to cover supplies and the bank will cut you a check.
Once the house is totally done and a certificate of occupancy (where applicable) is issued, your bank will convert the loan into a true mortgage, per the terms you discussed when you applied for it in the first place. You won’t see most of this stuff happening, but it’s definitely going on in the background. With a loan of this sort, it’s good to understand what’s happening when that much money is at stake.