Land Loans vs. Traditional Mortgages: What’s the Difference?

by Laura Mueller Buying land, like buying any piece of real estate, rarely comes cheap. What separates it from a conventional real estate purchase however is your available financing options. Land loans operate quite differently than traditional mortgages, and being aware of these differences is important—especially as you set your budget and determine what you can afford. Below, we’re covering the major things that set land loans apart from home mortgages, as well as popular options for financing your land purchase. Here’s what to know.

The Main Differences Between Land Loans and Mortgages

While it’s true that financing a house can come with plenty of hurdles, land investors often find that there’s a whole different set of hoops that have to be jumped through in order to secure funding for their purchase. There are a couple of reasons for this:

1. Land loans are considered riskier for lenders

Land—and vacant land in particular—doesn’t always have a lot of financial appeal for banks. Aside from the fact that there’s no physical structure to act as collateral, there’s also a pre-conception that because the borrower isn’t living on the land they won’t consider it a top priority if finances get tight.

2. Land loans usually come with higher interest rates

As you might expect, higher risk means higher interest rates. And while an added 1% or 2% in interest might not seem like much when you’re borrowing, it can add up fast over the course of your loan.

3. Land loans usually have less favorable terms

Speaking of the course of your land loan, expect a shorter payback period than you’d get with a traditional mortgage. Some lenders do offer 30-year loans for land just as you can get for a house, but it’s not uncommon to come across lenders that cap their land loans at a five- or ten-year payback period.

Land Loan Financing Options

It’s likely going to take a bit of research to figure out what your best option is for financing a land purchase, but you’re not totally on your own if big banks aren’t interested. Here are some other options:

FSA loans

If you’re buying land for agricultural purposes, you may be able to score a subsidized loan through the USDA Farm Service Agency’s Farm Loan Program. Known as FSA loans, these offer favorable rates and minimal requirements for those who qualify.

Seller financing

Some sellers are willing to work with buyers directly on financing. If you go this route, make sure to get an attorney involved so you can ensure the contract is favorable (and air tight).

Home equity loan

Land buyers with existing properties can use equity from current lines of credit to purchase land, and often with pretty favorable rates.

Smaller banks

Your local bank might be more interested in taking on a land loan than the bigger guys. Just be ready to pitch your plans much like you would for a business, with a clear outline of how you intend to use the land and how it will enable you to pay back what you borrow. Your best option for a land loan might not always be the most direct one. Work with a financial advisor to navigate what’s available, and consider that you’ll probably want to have more cash on hand for buying land than you would for buying a house. Like this article? Please feel free to share or post a link on your site: https://www.landhub.com/land-news/land-loans-vs-traditional-mortgages-whats-the-difference/