One of the best ways to build up your real estate portfolio is to snap up land that has not been improved yet but is in an area that is likely to see incredible growth over the next few years. Even if you don’t put any improvements on the property yourself, the increase in land value between the time you buy it and sell it can be considerable. However, when you approach a bank about issuing you a mortgage to assist with the purchase of a plot of land, things can go a little differently than they do with a traditional mortgage. Let’s take a look at some things you need to know about how land mortgage lenders operate.
First of all, you’re going to have to put down a larger down payment and pay a higher interest rate for a plot of land than you would if you were getting a mortgage for your own dwelling. Why? The risk for the lender is higher. Sure, if you default on the loan, the lender will get the land back. But the probability of you letting a plot of land go into default when expenses pile up is significantly higher than the probability of you allowing your own home to go into foreclosure if things get financially tight in your household budget. If you’re doing a vacant land refinance, the risk is often perceived as being higher – so your interest rate will be too.
There are also different types of land mortgage loans available depending on your plans for the property. If you plan to start tossing dirt around as soon as you acquire the property, the very first step you need to take when considering the purchase is to find out if the land is zoned for what you want to do, and whether the use you have in mind is legally permitted for that land. If you’re looking in a city center, you could be looking at a property in the middle of a confusing zoning map that was set out decades ago and has been turned into a patchwork quilt by a variety of changes between then and now. You’ll also want to pay for a professional survey to be done on the land. The purpose of the survey is to identify the exact property lines, any easements, points of access, and the exact dimensions. The access will have an impact on the property value – as well as your likelihood of gaining approval for a loan. If you really like the land and want to build, but the zoning is not in place to allow what you want, you would have to request a zoning change, which can be a lengthy process with an indeterminate outcome.
If you just plan to hold onto the land, especially raw land without any improvement plans in sight, is the hardest sort of land to gain mortgage approval for purchasing, because you’re basically purchasing the land to speculate on the future. There aren’t any streets, utilities, sewers or other form of infrastructure. You’ll have to pay property taxes on the land the whole time you’re holding onto it, but banks view that sort of land purchase as the riskiest – so they make it the most expensive in terms of interest rate over the life of the loan. A land loan refinance is one of the costliest refinance loans in terms of interest. Land mortgage lenders often pore through your financials very carefully.
This type of loan is called a “raw land loan,” because the land is “raw,” meaning that there are no infrastructure touches that have been made to it. You can expect to have some lenders ask you for a 50% down payment on this sort of purchase, although there are lenders who will fund the purchase with as little as 25% down. It’s better in these cases to work with a local lender who is aware of the land and knows its potential rather than a larger bank that does not have familiarity with the site. A lot of lenders will treat “raw land loans” as a commercial loan, even if you’re looking at it as a potential place to put down a vacation home. That means that even if you’re not a commercial investor, you need to prepare yourself for negotiation by looking at the ways that the interest is calculated for commercial loans and the other key differences between residential and commercial lending.
One other alternative that works with some raw land loans, especially out in a more rural area, is a seller financed loan. In this case, you make the down payment to the seller and then sign a loan agreement with him for the remainder, and you pay him just like you would pay back an institutional lender. You might end up with interest rates that are higher than the banks, but you can often get a seller to agree to a lower down payment in return. So if you are having a difficult time getting bank approval at the down payment that you can afford (or at all), seller financing is something to consider.
Another type of financing to consider for your land loan is a private lender. There are individuals and entities that are looking to invest in the mortgage market by funding commercial and residential loans, and brokerages like Amansad Financial have built up networks of these lenders, and we are constantly trying to match investors with loans so that it turns into a win-win for both parties: the borrower, who was struggling to find financing for the land purchase he wanted to carry out, and the investor, who was looking for a fairly high rate of return without the risk that the stock and commodities markets currently offer.
If you are looking for a land mortgage in an area that you see as a solid investment, talk to one of our mortgage specialists today. We have relationships with realtors throughout western Canada, so you can find out whether the land really represents the value that you think it does, and with lenders who are willing to put together packages for land loans at a reasonable rate. We look forward to helping you!