There are many types of land loans to consider. The most common is the traditional bank loan. Other options include owner financing, private party loans, and hard money loans.
Banks loans are the traditional loan for land and home purchases. They are still the main type of home loan but are less common for buying land. Banks are hesitant make land loans after the huge losses suffered during the Great Recession.
Bank loans usually have a lower interest rate than owner financing or hard money loans but have higher closing costs. If you can get approved the bank loan is still an excellent option to buy land.
Owner financing is the best of the land loans. In this arrangement the buyer pays a down payment and then makes payments to the seller. The seller acts as the bank. The advantages to sellers are the interest earned and the deferral of income for tax purposes.
There are also advantages to buyers. Although the interest rate may be higher than a bank there are minimal closing costs. (The interest rate is negotiated between buyer and seller.) There are usually no credit checks, helping buyers with lower credit scores.
Like a standard bank loan, owner financing is set up using standard legal documents which protect the seller in the event of a default.
Private Party Loans
A private party loan is money borrowed from an acquaintance or family member. There
are two types of private party loan. The first is a personal loan without collateral.
The second uses the land as collateral, similar to a bank loan or owner financing. The loan will be structured similar to a bank loan, or owner financing, allowing the lender (your friend or family member) to foreclose if a default occurs.
In either case you are looking for an acquaintance or family member willing to make you a loan.
Hard Money Loans
Hard money loans should only be used in extreme circumstances. This type of loan is known for high interest, high closing costs and short terms. Realtors, title companies or others involved in the real estate industry may know of individuals or companies willing to make a hard money loan. You can also search online.
I would recommend against a hard money loan. The costs are extremely high, and the terms strict.
If the seller is willing owner financing is the best option. Many sellers understand that cash buyers are rare and seller financing may be the only way to sell at a reasonable price. Owner financing is negotiated in the purchase contract, and setup by the title company.
Owner Financing, also know as seller financing, is a real estate transaction where the seller is also the lender. Owner financed land can be any real property, although it is more common with land than houses or commercial property.
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