Vacant Land Financing
With the new year there’s been a spike in inquires from those interested in buying land and building. This week we will dive into the background and requirements to buy land and constructing a home.
Vacant land financing is probably the least favorable real estate loan banks offer. The reason for this has to do with risk and an exit strategy. The risk is there because unlike a regular mortgage loan the conclusion isn’t right away. The day someone finally lives on the property is years down the road. In that time period a lot of things can happen. And if the worst case happens and the banks need foreclose, the market for vacant land is significantly smaller than homes ready to move it to.
To mitigate this risk, the longest term for a vacant land loan is 3 years. You have options to take 1, 2, or all 3 years. The shorter the term, the slightly better the rate. You will make interest-only payments during that time period. At the end of your loan term, the remaining principal is due. The decision as to how long to take out your land loan for depends on how quickly you feel you can get everything ready to start the construction phase of your project.
What happens in most cases is that during the 1 to 3 year time period you will obtain your plans, permits, contractor, and construction contract. When you have all those items ready to go, you will come back to us for your construction financing. Unless you have other means to pay off the vacant land loan, part of the funds of your construction loan are used to pay off the vacant land loan. You will only have one loan at any phase of the vacant land to construction period.
An important fact to note about qualifying for vacant land financing: When qualifying for the vacant land loan, you will also be scrutinized for the financial ability to complete the construction phase as well. That review is simply looking at your income and assets and determining if you have the ability to get a construction loan to finish off the project. The banks don’t want to see you stuck with a piece of vacant land and the inability to build upon it.
