Land loans and mortgages are both about borrowing money, the difference between them is that mortgages are used to both buy land and real estate, while land loans are only used to buy land says Graham Tobe, President and CEO of Owemanco.
Land loans are typically used to purchase a property such as raw land, vacant lots, recreational and agricultural land. The property can either be purchased for construction purposes or with the sole purpose of investment in which case people who acquire the land do not build on it or develop it in any way.
Land loans are demanded by a number of people for various reasons. Several individual buyers seek land loans to build the home of their dreams, while farmers look for land loans to buy property to grow crops, and corporations also get land loans to buy land for commercial use. In addition to this, real estate developers and builders often get land loans as well to build apartment buildings or homes with the hope of selling them in the future.
The ease and cost of borrowing vary depending on the purpose of the land loans. The cost of borrowing is generally higher and it is much more difficult to get land loans when there is no intention of building on the acquired land in the near future while comparatively, it’s easier and less costly to get land loans when the land is being bought for construction purposes.
Land loans are riskier for the lender compared to mortgages because in the case of foreclosure which is a legal process in which lenders seize the asset of the borrowers who default on their loan payments and further sell it to recover the balance of the loan, the lenders can easily liquidate the real estate property that is mortgaged since they can find a buyer relatively easily for a home or a building for instance and in turn get their hands on the amount that is due. On the other hand, foreclosing an empty lot is quite cumbersome, since the market for land is not as vibrant as the market for real estate, and recovering money can not only be time-consuming but also given that there are no guarantees that the lender can evenrecover the due amount, lenders don’t like them.
Hence, it is no surprise that in case of land loans more money is required to be deposited upfront and a higher interest rate is charged. This way the lenders are compensated for taking higher risks while giving out land loans.
Since getting land loans from banks is quite an arduous task and the interest rates charged are quite high, it may be viable to look for other financing options. Credit unions, commercial, and specialized lenders are generally open to giving land loans on very competitive interest rates. Their plans are relatively more flexible in comparison to banks which usually have quite rigid rules and regulations in place. Moreover, these other parties do try and understand the costs and benefits from the borrower’s point of view, are willing to negotiate and are more accommodating. Hence, it might be in your interest to consult with them and strike a mutually beneficial deal. Other than that, if you are looking to purchase a land in rural areas or are in a commercial contract with the government, then you can try and borrow from the government.
While banks are generally not willing to take the risk, mortgage brokerages may still lend you the money if they don’t have very many active loans or if they value your business and hope to retain you as a customer for future projects.