You have found the land you want to buy to eventually build your house and you can not wait to buy it. But you suddenly find that securing the financing of the land is not very easy. Why does your friend who built his house from scratch have no trouble getting a construction loan but you can not get a land loan? There are many reasons for this – lenders do not like to lend for land only; they far prefer to finance a real house than the land and will tell you. If you can get the mortgage loan, you can guarantee that you will pay much higher interest rates and less lucrative terms than if you had bought a house already built or even built your own home from the start.
There are fewer guarantees.
- The key point behind a mortgage is the collateral provided by the bank. When you take out a mortgage on an already built home, the house is the guarantee. This is pretty easy to accept for the bank because if you were to default, the bank would take the house after a number of missed payments. The bank could then turn around and sell your house and recover its funds. This is not the ideal situation for the bank because it does not want to use the necessary resources to sell the house; she’d rather profit from the interest on your loan, but it’s her backup plan when needed. used. With a home loan, there are not many guarantees available. Yes, they can take control of the land, but the vacant land is much harder to sell than a house already built.
There is no big reason for you to track your payments.
- Yes, in a perfect world, everyone makes their payments, especially when they buy the perfect land to build their house with a white picket fence. But then, there is a reality – and the reality is that not everyone can make the payments they intend to make in the long run. When you talk about payments on your already built home and where you live or even the house you build from the base, there is an incentive to make these payments because you need a place to live! With a land loan, there is no incentive because it is “just land”, you live elsewhere. If the financial situation becomes difficult, you will probably stop making the mortgage payments, leaving the bank in the trap with your loan.
Land loans are difficult to sell.
- If a lender does not plan to keep your loan in his books, it will be more difficult to call on an investor. Land loans are not lucrative in the world of investment. Investors are looking for loans with collateral and resale value. Even construction loans are worth more than land loans in the secondary market. In general, you will have to find a lender who will keep your loan in their books in order to obtain a loan. This is especially true if you do not intend to turn this land into a house built anytime soon.
You need a large down payment.
- Many banks require very large down payments on real estate loans as well as construction loans. Again, this is because there are very few guarantees on this type of loan. Even if you have drawn up the construction plans and are working on a construction loan, you are not providing the bank with a large amount of collateral to work with, which means that it must require a large down payment. It is not unusual to see land loans requiring down payments of 20, 30 or 40%. This is the only way for the bank to ensure that you will be motivated enough to continue making payments until you build your home and be able to repay the mortgage.
You can not be a high credit risk.
- Since land loans are not compliant and they are not easy to sell on the secondary market, lenders must be very demanding about who they lend to. As you do not deal with Fannie Mae or FHA guidelines, you will have to comply with the lender’s guidelines, which are generally stricter as they do not want to take out a loan that will not be repaid in the near future. If you do not have exceptional credit, it will be very difficult to get a land loan or even a construction loan.
Lenders are slowly starting to offer loans for land construction and construction as they gradually return to the housing market, but restrictions still exist. We will never see a lucrative housing market like the early 2000s. Lenders are going to be a lot more cautious about how they lend, especially when there are not many guarantees to mention in the process. If you are looking to buy land, it is best to consider building it right away and apply for a construction loan and land purchase loan at the same time. The construction loan is much easier to qualify for as the land loan only because of the amount of risk inherent in the land loan. In the end, you have the funds to build your custom home and you finally have a home to enjoy!