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Land Mortgage Loans - Land Mortgage Loans

General Features

buyer structure purchase property

While most people who get mortgages do so in order to purchase a house or other existing structure, land mortgage loans are a special type of mortgage for those who plan to purchase property that has no existing structure on the land. Home mortgages are much more frequent, and from the lender’s perspective, much less risky. Unlike a home mortgage, those who default on a land mortgage typically are not in danger of losing their homes. Also, it is harder for a bank or other lender to sell a empty piece of land than an existing home. Therefore, it is more difficult to get a large land mortgage loan without a substantial percentage of purchase price available for a down payment. Also, the lender sometimes requires the buyer to have mortgage insurance, even when a down payment of over 20% is available.

In addition to the the higher upfront cost for those applying for a land mortgage, other factors may also play into the lender’s decision about whether to loan the money. Since most people who purchase empty lots do so with the intent to build on the lot (improved loan), the lender could require the buyer to prove that he or she has the resources and proper zoning and building permits to build a structure on the land. If the buyer does not intend to build anything on the land (unimproved loan), but rather plan to use the property as an investment or for farming or open space, then it will probably be extremely difficult to get a land mortgage loan. Since these kinds of land purchases have little or no guarantee to provide any capital return, banks often view these purchases as extremely risky. In many, if not most cases, such purchases will require a full cash payment.

Those who are successful in gaining approval for a land mortgage loan will either get an unimproved land loan or an improved land loan. Unimproved land loans are quite rare, as mentioned above, because they are for land that the buyer has no plans to improve by building a house or other structure. When they are obtained, they typically have higher interest rates and require higher down payments, sometimes up to 50% of the purchase price. Improved land loans, for land that is intended for a structure, often lasts for 10 to 15 years. Typically these kinds of loans are paid off when the building is completed on the property and the buyer gets a new mortgage for that building. Rates on these kinds of loans depend more on the type of land than the borrower’s credit rating, so rates can sometimes be higher on land in quickly developing areas. If possible, some buyers work out a deal with the seller in those cases where, rather than obtaining a mortgage from a lender, the buyer pays a substantial down payment up front and then pays off the price of the property over an agreed upon period of time.

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