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Old 08-14-2019, 05:43 PM
shellofmyformerself is offline
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How do land loans work?


Iím looking at purchasing a plot of land. I donít want to/canít afford to build a home on it right now but plan on building at a later time (when my daughter graduates from college and is ďoff the payrollĒ so to speak).

A coworker mentioned that because Iím not building now, Iíll need to get a land loan versus a regular mortgage loan. I canít seem to find many details beyond what one is (for instance, where to apply for one).

Can anyone give me some basics? What are some things I need to consider? Iíve only ever bought one house (the one I live in, and I got screwed in that deal) so Iím pretty lost!
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Old 08-14-2019, 05:48 PM
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https://www.moneyunder30.com/how-to-...-land-purchase

Talk to your local bank about mortgages.
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Old 08-15-2019, 01:15 AM
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You need professional advice.
I ain't no professional...but I'd recommend that you also check into some issues:
1. you will be paying taxes on this land , whether you build or not. They may be expensive.
2. There may be a huge increase in those taxes after you build .
3. there may be a huge tax for capital improvements, that may not be applicable now, but will have to be paid when you build (i.e "improve") the land.
3. You may have to pay fees for sewage and water hookups (covering the expenses the city incurred when building the neighborhood.) These could be huge fees, which may not be applicable now, but will pop up when you apply for a building permit.
4. also, check zoning regulations which apply to your lot of land...what is permissible to build, how many square feet, is there need to file an environmental impact statement.

Did I mention that you need professional advice?
And get it from local experts who know the laws of your specific municipality. The laws may be very,very different 10 miles away, across the county line .
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Old 08-15-2019, 02:21 AM
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Is your co-worker right in thinking that you need a loan to finance this purchase?

If they are, then to all the property taxes, etc, that chappachula mentions you should add the cost of servicing the loan each year. Owning this land is going to be a recurring expense, at a time when you'll be deriving no benefit or value from the land. You're banking on the value of the land going up by more each year than it costs you to pay interest on your loan and pay your property taxes. If that doesn't happen, you'll be better off not buying a plot until you are ready to build, and just banking that money each year instead, towards a fund to assist with buying when the time comes.

(Unless, of course, you have your heart set on this particular plot, in which case you may be prepared to pay so that, in time, you can build on this plot rather than another.)

As to the question you ask, I'm not aware of any difference in principle between a loan to purchase undeveloped land, versus a loan to purchase land with buildings on it. Any loan secured on the land is a mortgage; it doesn't matter whether the land has buildings on it or not. But the bank might be a bit more conservative with the amount they will lend you when their only security is an undeveloped lot - as in, they won't lend you the same fraction of the purchase price as they would if this were land+house. Only way to find out is to ask the bank. Expect the bank also to want to know when you intend to develop the land and how you will finance that.
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Old 08-15-2019, 02:49 PM
Orwell is online now
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Quote:
Originally Posted by UDS View Post
As to the question you ask, I'm not aware of any difference in principle between a loan to purchase undeveloped land, versus a loan to purchase land with buildings on it. Any loan secured on the land is a mortgage; it doesn't matter whether the land has buildings on it or not. But the bank might be a bit more conservative with the amount they will lend you when their only security is an undeveloped lot - as in, they won't lend you the same fraction of the purchase price as they would if this were land+house. Only way to find out is to ask the bank. Expect the bank also to want to know when you intend to develop the land and how you will finance that.
Agree. The term "mortgage" just means a document that ties a parcel of real property as collateral for a loan. It is still a mortgage if it is secured by real estate, whether land, a house, a condo, etc.

From a practical standpoint, though, what the coworker means is that while you can normally borrow up to 90 or 95 percent for a house that you will be living in, at the low interest rates we are familiar with, borrowing to buy land is quite a bit different. Don't expect a loan-to-value (LTV) of more than 50 percent, and the interest rate will likely be higher, if you can find a bank to loan you money. House loans are usually sold on the secondary market, but land loans are typically held by the lender.

My advice would be if you can't easily afford to buy the land outright and pay taxes on it, then don't buy it. Too much can happen moving forward that you can't foresee. When you go to build a house, it will be much more straightforward if you own the land without a mortgage on it. You can apply the land's value as equity for your construction/house mortgage.

I just got done selling a lot that I bought 14 years ago that I thought we would build on. Instead, I paid taxes (that went up every year) on it for 14 years, and made very little money reselling it.
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Old 08-16-2019, 10:02 AM
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I bought some land and found it easier than buying my house. Called the agent on the for sale sign. She showed up and I made an offer. She called the seller and the offer was accepted. The next day she emailed some paperwork and I took that to my credit union. 3 days later my wife and I went to the credit union, signed some papers, handed over a check for the down payment and the property was ours.



I have an escrow account with the loan to take care of taxes. No insurance requirements, the property has no structures. I did buy a liability policy just to cover myself in case someone does get hurt on the property. No trespassing signs don't mean squat to attorneys.



The only issue I had was an old motorhome the seller left on the property. The sales agreement said he had 30 days to remove it but it sat for 3 months so I had it towed. The seller was not happy. Oh well.
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Old 08-16-2019, 10:23 AM
Orwell is online now
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If you do want to buy the land and get a loan, a credit union (as racer72 mentioned) or small community bank will be easier to deal with than a large bank.

racer72, what percentage of the purchase price did you borrow? The credit union didn't need an appraisal?
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Old 08-16-2019, 08:32 PM
shellofmyformerself is offline
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Thanks everyone for the info! I do have my heart set on this particular lot. It belonged to my great grandparents but due to unfortunate circumstances, was sold outside the family. This is the first time in over 30 years this land has been for sale. I would love to get it back into the family. Various family members own property all around it.

I do have one more question. They want to wait until January to sell it. Why would that be?
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Old 08-16-2019, 09:32 PM
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Originally Posted by shellofmyformerself View Post
Thanks everyone for the info! I do have my heart set on this particular lot. It belonged to my great grandparents but due to unfortunate circumstances, was sold outside the family. This is the first time in over 30 years this land has been for sale. I would love to get it back into the family. Various family members own property all around it.

I do have one more question. They want to wait until January to sell it. Why would that be?
Capital gains taxes? If the owners have owned it for 30 years, presumably they will sell for a lot more than they paid. Something in their personal situation makes them want to incur the capital gain income next year, perhaps.

I am waiting until 2020 to sell some stocks. I'd rather have the capital gain in 2020 so I don't go over the ACA tax credit limit this year.
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Old 08-17-2019, 08:58 AM
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That makes sense. Thank you for the info!
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Old 08-17-2019, 09:16 AM
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You might also ask the sellers if they'd be willing to finance it. A lot of people selling land are willing to do that. It's a long shot, but worth asking. Could be cheaper than the bank.
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