You’ve decided to make that land purchase for your eventual log cabin retirement home site. Now is definitely the time to buy. The drawback is getting financing. If you haven’t already started your research, you’ll soon discover that undeveloped land is not exactly a lender’s favorite collateral. A lot of major banks aren’t interested in financing only land. First of all, you will want to focus on smaller local lenders that are at least familiar with the area of the property.
Why is undeveloped land so much more risky than developed? It’s primarily because unimproved land can’t be used to generate income. It’s also a lot easier for the borrower to stop making payments and walk away from land than a property with his home on it. If there’s no road and/or no utility access to the land which is not unusual for a log cabin site, lenders are even less interested. There’s a lot more downside risk than interest income for the lender.
Due to this collateral risk profile, lenders that do finance land, will have much more stringent conditions than a home mortgage. They want to be assured that you have the ability to make the payments. The more confident they are, the lower the down payment required. You can also provide other collateral besides the land. In any case, they don’t want your land. They want your monthly payments. They will typically require:
Higher credit standing
Higher interest rate
Shorter term – 10-15 years compared to 30 year mortgage
Higher down payment 25-30%
If you don’t have the full down payment or your credit doesn’t cut the mustard, what do you do? There’s always one possibility. Who is possibly even more motivated than you for you to be able to buy the land? The seller may be willing to provide you with financing. The conditions such as financing term and rate will depend on your negotiating skills, how desperate the seller is and when the seller needs the money. He may be perfectly content to just get a payment every month for a long term. A seller will usually want at least 20% down but again, that is negotiable.
I bought my log cabin land from a developer. I ended up paying 100% cash from my IRA (see my related article “Using Your IRA to Buy Land for a Log Cabin.”) I did find out that the developer had occasionally lent short term money to buyers. The financing structure was a ‘land contract’, also known as a ‘contract for deed.’ The term is 12-18 months and a down payment is required. The monthly payments include some principal amortization. A large balloon payment (remaining principal) is payable at the end of term.
The developer still holds title and if the buyer does not refinance/pay off the balloon at the end of the term, the developer keeps all the payments as well the property. If you do refinance, you get the title. You had better be confident in your ability to refinance or this option is quite expensive.