(Photos courtesy of Connie Popham Moore, Pierce Co.)

If you are considering a land purchase, whether it is a residential lot, multi-acre tract or commercial land, it is entirely different and more complex than purchasing an existing home.  There are many factors that need to be carefully examined when making a land purchase, but once a purchase decision has been made, it is time to close the deal. Ideally, paying cash for a land purchase translates to a smoother and faster closing, but many buyers that are not in a position to tie up all their cash will need to consider other financing options.

 

Traditional Loan

Securing a traditional loan is more complex that securing a home loan, because lenders are assuming more risk.  Land buyers need good credit history, sizeable down payment and a strong plan to present the lender for paying back the loan. Interest rates are higher for land loans, because the land has no improvements yet to serve as collateral. Land loans require a minimum of 20-25% down, but lenders may ask for as much as 50% of the purchase price, depending on the type of land being purchased and its intended use. The larger the down payment amount, the greater the odds of loan approval. If the buyer has a plan to develop the land right away, a smaller down payment is often acceptable to the lender.  In the event a loan application is denied, there are many other financing options that can be pursued. 

 

Owner Financing

Sometimes a land owner will agree to finance the land for a buyer.  Instead of paying a lender, the buyer pays the seller a monthly payment plus interest.  The seller can finance the entire purchase price, less the down payment, or finance a portion of the sales price. Terms for owner financing varies, because they are negotiated between individual buyers and sellers. 

 

 Home Equity Line of Credit (HELOC)

With a home equity loan, the home that you currently own secures the loan.  Borrowers can usually secure a low interest rate, since there is less risk to the lender.  Another option to consider is refinancing a current mortgage with cash out to purchase land. Both HELOC loan and refinancing does require the homeowner have good credit.  It is a good idea to know your FICO credit score and avoid any large purchases prior to making application.

Benefits of a Home Equity loan:

·         Can be fixed rate or variable rate

·         Shorter terms than traditional loans

·         Lower closing costs

·         Potential for tax deduction generated by interest

 

IRA or 401K Transfer

Many individuals are not aware of the fact that they can make a real estate purchase using their 401K or “self-directed” IRA retirement accounts. The 401K and IRA are different types of accounts with different rules for each. The methods for applying funds toward a real estate purchase are different as well.  For anyone considering pursuing this route for financing property, always seek the guidance of a tax advisor or Certified Public Account before proceeding. 

401K- Owners of a 401K cannot simply purchase real estate with the account. The funds for the purchase must first be liquidated. After the funds have been withdrawn, the owner is required to pay taxes on the amount withdrawn in addition to a penalty (usually 10%) for early withdrawal. In order to avoid this, there are two other options that are available. A healthy 401K can be rolled over into a “self-directed” IRA (with no penalties and deferred taxes) or the account owner can take out a loan against the 401K, using the equity without actually removing funds. Every 401K has specific rules and there is a limit to how much money can be borrowed against the account.

IRA- The rules and regulations for “self-directed” IRA’s are different, depending on the custodian. If the custodian does not restrict investment options, IRA account owners can take advantage of the full range of IRS-permitted assets, including real estate.  Buyers are advised to speak with a financial advisor for guidance on purchasing land using an IRA.

 

Farm Loans

 Farm loan programs are designed for farmers and ranchers who cannot, for whatever reason, obtain a conventional loan from a bank or Farm Credit System institution.  Farm loans are made by private lenders but guaranteed by the USDA Farm Service Agency or by Farmer MAC (Federal Agriculture Mortgage Corporation). Established farmers and beginning farmers can go through this program to meet their individual needs. There are several types of Farm Ownership (FO) and Operating Loans (OL) that fall under this program, each designed for specific needs of the farmer. The individual loan limits are set by statutes and differ by each type. In order to be eligible for the program, certain criteria have to be met.

Benefits:

·     Can be used to purchase anything essential to operating a farm or ranch

·     Loan can be used to refinance existing debt

·     No prepayment penalties

·     No penalties for refinancing of selling the farm/ranch

·     Stable long term rates

 

The information provided on our website regarding loan programs is for basic information purposes only. Innovative Land Solutions brokers and agents will not provide a statement of loan terms or closing costs. Our team can refer interested individuals to several local, licensed mortgage loan originators. Seek the advice of a licensed professional for tax/and or legal issues.