Although buying a home is a concrete part of the American dream for most adults, owning land as part of an investment strategy or wealth-building plan is becoming more popular. Having a small, untouched piece of property holds quite a bit of potential for building a home in the future, farming, or starting another business.
However, the ins and outs of financing vacant land plots can be difficult to navigate since they differ from financing a traditional home purchase. If you’re in the market for vacant land, here’s what you need to consider before starting the land-buying process.
Get to Know the Types of Vacant Land
There are two main categories of land which can be bought: improved land lots and raw land.
Improved Land Lot
The former is fairly simple to recognize in that some work has already been done to improve untouched, vacant land. This could mean someone added an access road or driveway, or that utilities have been connected to the property in some form. A plot of improved land typically costs more than its counterpart, raw land.
Raw Land
Raw land is a completely undeveloped area with no sewers, electricity, or roads. With raw land plots, no human or machine has done much, if anything at all, to enhance the natural landscape of the property. The possibilities are endless with unimproved land, but potential buyers may find it more difficult to convince a lender to finance the purchase of untouched land.
Land lots without major structures or other dwelling enhancements are also commonly referred to as spare ground, urban prairie, vacant lots, empty lots, or undeveloped lots.
Understand the Lender’s Perspective
Regarding lenders, it is important to know what you are up against when buying improved land or raw land that is vacant.
Improved Land
Improved land is far easier to obtain financing for, given that the lender can see the possibility of building a home; installing a mobile, manufactured, or modular home; or operating a business on the property. Should the owner default before the final improvements are made, the land is less of a hassle to unload to another buyer.
Raw Land
For raw land, however, lenders view the purchase as a risk. If the landowner walks away from the vacant land without repaying what is owed, the lender has a lower chance of reselling the property in a timely fashion. While it is possible to finance raw land through willing lenders, potential buyers have their work cut out for them before signing on the dotted line.
Do Your Homework on the Vacant Land
To secure financing for a vacant land purchase that has not been improved upon in any way, buyers should take the time to complete a handful of steps first.
1. Conduct a Land Survey
Start with a land survey that details the boundaries of the property. In some cases, the seller of the land has this information readily available, but other times, a land survey needs to be completed to determine the property’s limits.
Once the survey is complete, it may also be necessary for potential buyers to conduct an easement and title search.
2. See if Easements Exist
An easement is essentially a list of individuals or businesses with permission to use or enter the property, such as a utility company or city to repair underground pipes.
3. Do a Property Title Search
A title search provides information about the different easements connected to a piece of vacant land but also offers a history of property ownership including liens that may be linked to the title.
4. Research Area Zoning Laws
Vacant land buyers should also look into the zoning laws applicable to the property to ensure plans to build or develop are not impeded. Residential and commercial zoning laws are the most common, but there may be designations for agriculture or other special uses as well.
5. Get a Property Appraisal
Once this information is known, an appraisal is often needed to figure out the land’s estimated value. The appraised value of the vacant land serves as the foundation for financing options, no matter the intended use of the property in the future.
Select the Right Land Financing Option
Although there are fewer options for financing vacant land than there are for purchasing real estate with a stick-built or manufactured home already in place, potential buyers do have viable solutions for financing a land purchase. Here are the most common ways to finance land:
a. Community Bank Financing
It may be tempting to work with a large, national bank to secure land financing, but buyers may have better luck working with a community bank or local credit union.
First, smaller financial institutions do not often sell their loan portfolios in the secondary market, meaning riskier loans like vacant land financing need not conform to tighter loan characteristics. While it isn’t always a slam dunk, community banks and credit unions may offer more affordable terms to land buyers than national lenders.
You will typically need 20% or more down and great credit to buy unimproved or raw land, or improved land with a mortgage loan. Further, the interest rate on land loans will usually be higher than that for a single-family residence.
b. Home Equity Lending
Current homeowners may have the option to access the equity built up in their primary residence to help finance a vacant land purchase. Home equity loans and lines of credit can be a more affordable, flexible solution than a traditional vacant land mortgage loan, but a default on the loan or line of credit puts the primary residence at risk.
c. Government-Backed Land Loans
There are a handful of government mortgage loans made available through the U.S. Department of Agriculture which may be used to buy vacant land. A USDA mortgage loan comes with stringent credit requirements and specific property eligibility criteria, but for qualified buyers, these loans may be a strong contender in financing a land purchase.
d. Owner-Financed Vacant Land Loans
Another option for financing a vacant land purchase is owner-finance agreements, also known as a seller-financed loan. With this solution, the potential buyer creates a promissory note with the current owner of the land, detailing the conditions for paying for the land over time.
This type of financing can be helpful for buyers with bad credit, people who need to put less money down, or those who require other non-traditional terms.
c. Personal Loans
You can also buy land with a personal loan. Personal loans are the most accessible to couples and individuals with good credit, are quicker to obtain than other financing options, and don’t require a down payment or collateral to receive the funds.
Personal loans of up to $50,000 are the easiest to acquire, however, individuals with enough income and a low debt-to-income (DTI) ratio may be able to borrow more money by searching around.
Final Thoughts on Buying Vacant Land
Before diving into the adventure of land ownership, potential buyers should have a solid understanding of what the land will be used for now or in the future. Land that will be used for farming will have different requirements than land you plan to build a house or put a mobile home on.
Understanding which type of land you are buying, how lenders view that type of property, and what is required to best suit your needs, can ensure the vacant land is appropriate for your use and you’re ready to make the purchase.
Finally, it is crucial to know the types of financing options available before and after the land purchase. For example, do expect to be able to take out an equity loan on the vacant land? Each land financing option, with the exception of an owner-financed loan, requires a review of the borrower’s credit history and score, income, other assets, and debts.
