Buying Land: Exploring Your Options

Buying Land: Exploring Your Options

As a mortgage loan originator, I often get asked about the minimum down payment required for purchasing land. Unlike traditional mortgage loans, buying land involves different loan programs with varying down payment options, rates, and terms. In this article, I’ll break down the different types of land and the financing options available to you.

Northview Bank Park Rapids
Northview Bank Park Rapids

Understanding the Types of Land

Before diving into the financing details, it’s important to understand the different types of land available for purchase.

Raw Land

Raw land refers to undeveloped land without access to city amenities such as water, sewer, and roads. This type of land is typically located far away from urban areas and is often used for hunting or recreational purposes.

Unimproved Land

Similar to raw land, unimproved land has some level of development. It may have utilities or be closer to developed areas, making it easier to develop in the future. Unimproved land is usually found outside metropolitan areas.

Improved Land

Improved land has access to essential amenities such as roads, electricity, and city water. This type of land is typically located near existing housing and developments. Improved land is what you would consider for a typical lot loan in a city.

Exploring Financing Options

Now that you understand the types of land, let’s look at the financing options available to you.

Seller Financing or Contract for Deed

Seller financing, also known as a contract for deed, can be a useful tool when purchasing land. In this scenario, the seller acts as the bank, and you make monthly payments directly to them based on the agreed terms. This approach allows you to bypass some of the requirements typically imposed by traditional lenders.

Bank Financing

If you prefer to go through a bank for your land purchase, there are options available. For example, Northview Bank offers a program with a 20% down payment requirement for any type of land in Minnesota. However, a credit score of 660 is necessary, and the loans are either 15-year fixed or 20-year balloon loans with slightly higher rates compared to FHA or conventional loans.

Using Home Equity

Another option to finance a land purchase is by tapping into the equity of your current home. You can do this through a home equity line of credit (HELOC) or a cash-out refinance on your primary residence or investment property. By leveraging the equity, you can access funds for the down payment on the land.

USDA Loans

If you are considering purchasing land in rural areas, a USDA loan may be an option worth exploring. These loans are specifically designed for primary residences in rural locations and offer 100% financing, meaning there is no down payment required. However, certain eligibility criteria, such as minimum credit scores and household income limits, must be met.

Consider Your Path to Land Ownership

When deciding on your financing method, it’s important to consider your long-term goals and the purpose of the land. Are you planning to build on the land? Is it for speculation, hunting, or recreational purposes? Evaluating your objectives will help you determine the best financing option for your needs.

Remember, traditional mortgage loan terms, rates, and down payments won’t necessarily apply to land purchases. Local banks and credit unions often offer land loans with their own unique terms and conditions. Be prepared for a different lending landscape compared to the standard 30-year fixed rate mortgage.

If you’re considering a land purchase, it’s worth exploring different options and connecting with lenders who specialize in land financing. You can find more information and resources on our Banking Blog. Don’t let the down payment be a barrier to your dream of land ownership. Happy exploring!

If you found this article helpful, please subscribe and hit the bell for updates. Share your thoughts and questions in the comments section, or reach out to me directly through the contact information provided.

Leave a Comment