The process of buying land can seem confusing to those who have never done it before. No two properties are the same and many people have very different goals when it comes to what they want to do with the land they want to purchase. Some are investing for the long run, and others are ready to get started on their next project as soon as the paperwork is signed. No matter what your goals are, this article has everything you need to know about the process of buying land.
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Table of Contents: Click the link below to jump to your question!
Before buying land:
- What to know before buying land
- How to find land to buy
- What makes a land loan different than other loans?
Ready to buy land:
- Steps to purchase land
- Where to get a loan for land
- Land Loan Application Requirements
- Pre-qualification vs Pre-approval
- How to get a loan for land
- Is there special financing for first time land buyers?
What to know before buying land
Prior to purchasing land, it is important for you to know what you intend to do with it. Without a goal or a general direction of purpose for the property (and how you’ll use the loan funds), your lender won’t be able to determine how to best structure your loan. Unlike a property that already has improvements or structures (like fencing, access road, etc.) on it, the property type and purpose is undefined for bare land.
If your goal with your land is to produce something and make money from it, you can use our free business plan template to start working out the details of your future business.
How to find land to buy
There are many routes you can take when searching for land. Some involve a little more effort but with a mixed approach, once you start looking for the opportunity to purchase land, you’re more likely to find what you’re looking for. Here’s how we suggest finding land to purchase:
One of the easiest ways to find land to purchase is online; all you have to do is search for “Land for sale in ___”. If you want to use more specific resources to find bare land, the Lands of America Network (Land.com) has many websites dedicated to land and bare land listings.
Through a Realtor
Another good way to find land for sale in a specific area is to enlist the help of a realtor who knows the marketplace in which you would like to purchase. Realtors see new listings as they become live and may even know about potential listings before they are shared publicly.
Get Active in the Community
If you haven’t already started building your network of professionals in the rural community, this can also be a viable way to help you find land for sale as well. Reach out to local commodity groups, builders, realtors and farmers to get involved in your local rural community and start talking to folks about what you’re looking for.
What makes a land loan different than other loans?
Land loans are inherently more risky for a bank because of the way land values fluctuate in the bare land market – there really isn’t much stability or consistency across the board.
As an example, it’s easy to get an appraisal on a home on an acre because there are typically many other properties that an appraiser can use to compare to get an accurate valuation. On the other hand, an acre sized property without a home has less comparable properties to accurately determine the true value of the property.
The key thing to remember here is: every piece of property is different because of the land use it may currently have or has the potential to have in the future. Some tracts are uncleared and serve as timberland. Some tracts are zoned agricultural and will be used in production ag.
Another piece that feeds into determining land value is what kinds of structures or improvements have already been worked into this land. Buildings like barns and homes, or improvements like access roads, are going to alter the way the property is valued because there has already been some kind of investment made.
The unfortunate truth is that many regular banks are not willing to provide financing for land because of this risk – if a land loan is defaulted on, the only way to repay the outstanding debt is for the bank to take ownership of the land, which is not ideal for the bank or their balance sheet. This is a highly specialized area of financing which means you need to make sure you’re choosing a lender that understands your goals and wants to work with you. Here’s how to pick a trusted lender.
What steps do we need to take to purchase the land?
This process is going to look different for each buyer – but don’t be discouraged. The most important things for you to figure out as a buyer are:
- Purpose for the purchase and the intent of use for the property,
- How you’re going to finance it (how much money you have for a down payment, what you can afford, etc.), and
- Who you’re using as a realtor (or maybe not).
Where to get a loan for land?
Many lenders offer financing for land and will structure loans specific to an intended use for the property – which can be good or bad. As an example, let’s say you want to buy land to build a home. With other lenders, you may get a loan that has a 1-3 year balloon that requires you to begin construction on a home at that time or forces you to refinance with another lender. Not great for you if you change your mind or your plans change.
Farm Credit understands that plans aren’t always set in stone, so we offer loans that are flexible to meet your needs, no matter whether your goals are long term or short term. We offer loans for bare land, loans for buying land to build a home, operating loans for agricultural purpose properties, and more!
Land Loan Application Requirements – How to tell if I am eligible for a land loan now?
If you haven’t found the particular property you may want to purchase yet, then a pre-qualification may be the best first step to make sure you are a qualified candidate to apply for the loan.
If you’ve already found the property and are interested in making an offer, you would continue with a formal application as a pre-approval. This would involve a formal qualification, and having the lender pull a credit score for each applicant. Farm Credit typically asks for several items of documentation, including: personal identification, income verification, and a list of assets/liabilities. You’ll want to make sure to give us a call before gathering all of these items, to make sure you don’t have to provide anything else. Because each piece of property is different, you may be required to submit other key pieces of information.
An important thing to note is: “One of the many misconceptions about Farm Credit is that we only finance farmers and that’s simply not true. Our membership is very diverse and many have full time jobs that help them afford their rural property that aren’t in agricultural production,” explains Kelsey Feeg, a loan officer in our Shoemakersville, PA office.
Pre-approval for land loan VS pre-qualification for a land loan – Which do I need and when?
The answer to this question really depends on where you’re at in your process. If you’ve already found the property you want and have an agreement of sale, then we would work this through our process as a formal approval.
A pre-approval may be the best choice for you if you have a few properties identified as potential purchases and would like a formal answer from our credit team. If you’re in a hurry to move on a property, or if you’re early in the process, then a pre-qualification may be appropriate. Speaking with a loan officer is the best first step in this process to determine how the potential application should be handled – we are happy to do both!
Loan Process – How to get a loan for land?
When deciding on which lender to get a land loan from, make sure to prioritize flexibility – after all, it is your land and your decision what to do with it! Often times, buyers say they know they want to construct a home on the property, but then their plans will change after the loan is written. Many lenders don’t factor this flexibility into your loan package which will likely cost you time and money if you have to restructure your loan or want to pay it off ahead of time.
With Farm Credit, members enjoy the ability to pay on their loan as scheduled, without disruption, and payoff the loan early if they choose, without pre-payment penalty fees.
The flexibility factor is especially true for a lot loan for which you might be planning a home construction in the future and even for larger tracts of farm land. You’re in charge of what you want to do with your land when you finance with Farm Credit. We also have long term fixed rates which give you the security to counter balance the flexibility previously noted.
If you’re curious about how to get a Farm Credit loan, check out our Loan Process Simulator and learn the step by step process.
Is special financing available for first time land buyers?
Because land is a specialized area when it comes to financing, there are not FHA type programs available for land. Because most of these types of financing programs would be held and serviced in-house by a bank, a minimum of a 20% down payment is typically required. This is especially true for a more residential type purpose for a land loan.
For a larger tract being purchased for farming or agricultural use, loan programs through the FSA may be appropriate. However, you’ll want to make sure that you qualify for those programs through conversations with your local FSA office(s).
If you’re ready to begin your journey buying land to build a home or buying land to farm, fill out this form to speak with a loan officer today to discuss your options.