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Getting a Loan

Lot loans are more difficult to obtain than loans for existing residential property. Want a $300,000 loan to buy a condo? No money down? If your credit is good, you'll have no problem getting the loan financed at an attractive interest rate. And you'll have 30 years to pay the money back

But what if you want $300,000 to buy a lot? Can you walk into a bank and borrow $300,000 against raw land? It won't work! No bank will advance a 100% loan for a land purchase. The best you can hope for is to put 20% down, and even then you'll probably have to pay the balance off in two to five years.

Many people who buy land are intending to build a home, and if this is the case they often use something called a Construct to Perm loan. With this kind of loan you get the bank to approve the plans of the home you want to build on your lot. The bank's appraiser visits the lot, looks at the plans, and values the final built home on the lot. The buyer then borrows against the value of the built property. If the value is, say $800,000, the buyer may want to borrow 75% of the value, that is, $600,000.

When escrow closes on the lot, the bank funds sufficient of the loan to buy the lot. The buyer then starts to pay interest on this amount. As building proceeds, the bank pays out additional money in a series of draws. The final draw is paid when construction is complete.

This kind of loan is great for the buyer who is intending to build soon after they buy a lot.  Many people don't do this however. They want to buy now to take advantage of current prices and possible future scarcity of land. In this case there are several alternative sources of funding that could be considered.

Creative financing

In some cases the seller of the lot may be 'willing to carry', which means the seller acts as a banker and receives interest directly from the buyer, usually at monthly intervals. There is no traditional mortgage, but instead the seller's real estate agent or attorney draws up the necessary contract to formalize the arrangement. The interest rates on owner-funded purchases are usually competitive, but it is quite usual for this to be a short term arrangement, for five years or less.

An alternative form of funding often used is the second mortgage. Let's say the lot costs $300,000 and you have $30,000 as a down payment. Your own home is worth $800,000 and your mortgage is $300,000. You could take out a second mortgage, often in the form of a home equity line of credit. You will have borrowed at a lower interest rate than many lot loans and the loan will be long-term. Also, as the loan is against your existing property it is eligible for tax relief. No wonder this is becoming an attractive proposition for many potential lot buyers!



This website has been written and developed by Rob Ransom, PhD. Rob has extensive experience working with buyers and sellers of vacant land in San Diego County, CA. Although Rob currently has a California real estate license he is retired from selling real estate.

If you have comments or suggestions regarding this web site, email Rob at the address below.


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