How is a Land Loan Different from a Home Loan?

If you’ve ever purchased a home, you’re familiar with the process of obtaining a mortgage. But what if you are looking to buy land? Is the process the same?

Whether it’s for hunting, fishing, starting a hobby farm, or eventually building a home, buying land actually works a bit differently than a buying a standard home. Let’s take a look at what sets it apart.

Land loans are considered riskier

Kyle Wright, financial services officer with GreenStone Farm Credit Services, says that when applying for a land loan, you’ll need to provide the same financial information as you would with a traditional mortgage. The big difference, he says, comes down to underwriting.

“A mortgage uses the home as collateral, but with a vacant land purchase, there is no home,” he said. “If an individual owns a home in town, but also owns a 10-acre parcel of hunting land, he/she would likely stop paying on the land first should financial issues arise, so these loans are viewed as higher risk”

If a lender must foreclose on a land loan, there is no guarantee of recovering the money. Vacant land is often harder to sell because there is less demand for it. When you consider this reality, it’s easy to see why a land loan would require higher credit scores, lower debt-to-income ratios, and a higher down payment than what is accepted for a traditional mortgage. These loans also typically come with slightly higher rates than conventional home financing options.

“At GreenStone, we look at the potential purchase, the type of specialized financing required, and how it aligns with the individual’s overall financial picture,” said Wright. “For purchases with acreage, the majority of what we offer does require a 20 percent down payment. But we can use different methodologies to get to that 20 percent, and we work one-on-one with our customers to address any roadblocks we may come across.”

There are some other differences

As mentioned, when purchasing a rural plot of land, a lender will collect your financial information just as they would with a regular home loan. They will also require an appraisal and, of course, title work will need to be done.

However, unlike a standard mortgage, lenders don’t require the purchase of insurance on vacant land, and there typically aren’t any inspections or surveys required. However, Wright does recommend a survey on parcels 10 acres or less, so buyers have a good understanding of their property lines. For more information on specific land evaluations, inspections, or environmental testing, Wright suggests consulting a REALTOR®.

“An experienced agent will know what is required in each municipality and will likely suggest additional evaluations, if necessary,” he said. “I had a customer who was financing a parcel of land, and the REALTOR® suggested a soil evaluation of the property. After the evaluation was completed, there were items identified on the land that needed remediation. Ultimately, it did not suit the buyer and their intended use. Without the REALTOR® suggesting this evaluation, the buyer very well could have purchased land that was not right for them.”

It’s a niche market

While there are a variety of lending institutions that may offer vacant land loans, there are benefits to working with a lender who specializes in this area.

“Some banks or credit unions do offer vacant land financing, but my customers have found they come with shorter terms, balloon payments, higher down payment requirements, or even timeframe requirements to build a home,” said Wright. “GreenStone offers up to a 30-year, fixed rate on vacant land loans without a requirement for structures to be placed on the property, which is pretty unique in our industry.”.

This specialty also means that GreenStone has a large network of experienced professionals both inside and outside the company who can assist customers throughout their transactions.

“We have our own internal appraisal department, as well as teams that provide accounting and tax services,” said Wright. “This allows GreenStone the ability to offer specialized assistance to our customers and potential customers when they are searching for their new hunting spot, hobby farm, or home with space, creating value whether they choose to finance with GreenStone or another lender in the marketplace."

There are many factors in determining the right land loan program, including the size of the property and how it will be used. Wright says that anyone interested in purchasing land should set up a consultation with an experienced lender.

“Maybe we’ll find that a USDA loan is a better option for you, or maybe it makes sense to do a land contract for a year,” he said. “Together, we can talk through your financial situation, go over all the available options, and come up with the right solution, whether that means buying now, or working toward your goal of purchasing in the future.”

For a list of local service providers, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.