Financing Vacant Land – What you Need to Know

Securing financing for vacant land is usually quite different from obtaining a loan for a developed property with improvements or existing structures.  Here are some steps you can consider to help understand how the process works, and help increase your chances of securing financing for vacant land.  As always nothing in this article should be taken as “advise”: these are simply just general recommendations from someone who’s trying to pass along someone helpful words of wisdom.

Research Lenders

Start by researching lenders who specialize in land loans. Credit unions and online lenders or local banks may offer such financing options, but please keep in mind – you may find that institutions who offer financing for vacant land may be much harder to come by than any conventional loan.  The primary reason for this, is simple: the property usually contains no collateral in terms of a value perspective, and this is something banks are often wary of.  Your best bet is to search for institutions that have experience in providing vacant land loans and financing.

     NOTE: At time of this writing, interest rates are through the roof thanks to the economic crisis we are currently experiencing, so finding reasonable rates may be hard to come by, especially if credit scores are not up-to-speed.

Determine Your Needs

Clarify your financing needs, such as the amount, interest rates, repayment terms, and any other conditions you’re looking for.  Being familiar with your requirements up front (and being able to communicate them to prospecting loan providers) will help you evaluate options when they present themselves.

Ask About Owner Financing First

With today’s borrowing rates being at (or near) all-time highs, seeking owner-financing may be an attractive option to at least inquire about.  This is when the seller of the land basically acts as the bank.  Even if seller financing is not offered as part of the property’s description, often times owners are willing to consider it, so if financing a purchase is what you’re looking for, it doesn’t hurt to ask.

Prepare Your Documentation

Gather all the necessary documentation to support your loan application.  This typically includes personal financial statements, tax returns, proof of income, information about the land, such as its location, size, intended use.  In addition to all these documents, many institutions will also require proof of employment.

Assess the Land’s Value

The lender will want to evaluate the value of the vacant land to determine it’s worth as collateral.  As mentioned above, having no structures on the property often times means more down payment required and/or higher interest rates.  It may be beneficial to obtain an appraisal, as it will help provide comparable sales data for similar properties in that particular area. This information can help you demonstrate the land’s potential and increase your chances of getting financing when you present your loan application to the bank.

NOTE: knowing if the property is in a flood zone or not is also helpful in determining the land’s value, as land in a flood zone can have major affects on market value.  Learn how to determine flood zone HERE

Improve Your Credit Score

A responsible financial history can significantly improve your chances of obtaining financing for vacant land.  Take steps to improve your credit profile by, reducing existing debt, paying bills responsibly.

Be Ready For a Down Payment

As mentioned above, lenders often require a higher down payment for vacant land loans compared to loans for developed properties. Save up for a substantial down payment to demonstrate your commitment and reduce the lender’s risk. A down payment of 20% or even more can typically be expected for vacant land and sometimes this can exceed30 or even 40%.

Explore Loan Options

Different loan options may be available, such personal loans, traditional mortgages and specific land loans.  Each option has it’s own requirements and terms, so it’s important to compare all options from a pros vs cons standpoint while making your decision.

In closing: Remember, the availability of financing for vacant land can vary depending on factors such as location, intended use, and market conditions.  It’s essential to thoroughly research and compare different lenders and loan options to find the best fit for your specific needs.