by Laura Mueller
Planning to make a land purchase? Unless you’re going to be paying entirely in cash then you’re going to need to secure a land loan—and that’s going to require a down payment. Down payments for land loans operate a bit differently than down payments for traditional real estate purchases though, and it’s important to understand what’s expected of you so that you can be sure to find a plot of land that fits within your budget. To help you do the math, we’ve broken down some of the key factors to know about down payments for land loans.
How Much is a Down Payment for Land?
Generally speaking, a lender will require anywhere between 20% and 50% of the purchase price for land in order to secure a loan. Why is it so high? Land is considered a riskier investment than houses and other structures, and lenders want to be sure to get as much principal up front as they can. That being said, it is possible to find lenders who will allow you to get funding without putting so much down. If you’re on the hunt for one, work with a mortgage broker so you can be sure you get a full view of all of your available lending options.
Factors That Affect Your Down Payment Amount
You won’t know exactly what your lender is going to request as a down payment until you speak with them, but there are some factors that may suggest your down payment will be higher or lower on the spectrum. For example, down payments for raw land tend to be higher than down payments on improved lots or land that you intend to immediately build on. Your previous lending history may come into play here as well.
Remember: it comes down to risk for the lender. The more risk they think they’re taking on, the more money they’re going to require from the buyer up front. Raw, unimproved land is perceived to be riskier, and as such, you can reasonably expect your down payment to be higher.
What About Interest Rates?
In most cases, the higher your down payment for a land loan the higher your interest rate is going to be too. While it might not seem fair—after all, you’re taking on less interest to begin with—lenders don’t see huge dollar signs when providing loans for raw land. A lot can happen between the purchase of your land in an unimproved state and the plans that you have for it, and you’ll likely need to come up with a large amount of additional funding to get your raw land to a profitable state. As a result, lenders tend to tack on higher interest rates to these high-risk loans to ensure that they get as much of a return as possible.
So what’s your best bet for getting a good deal on your down payment? Go into the lending process with a clear and concise proposal about your plans for optimizing your land investment, including the direct steps that you’ll take to get there. The more you can prove to a lender that they’re making a smart choice lending you the money, the more favorable your loan terms should be.
Like this article? Please feel free to share or post a link on your site: https://www.landhub.com/land-news/understanding-down-payments-for-land-loans/