Why Land Loans Are Hard to Find?
As a general rule, commercial lenders (the big banks) do not make land loans. Anyone interested in buying property to build a home, to use for farming or simply to have as a place to get away from it all, has to wonder why it is so hard to get a loan for this purchase. Here’s the answer.
Commercial lenders, like the banks that take your application over the internet, have what you might call a “formula” for lending. They mainly lend money for homes and cars. Those items fit into their formula, because it is easy to access their value.
The value of a piece of undeveloped property is often more difficult to determine based on comparable sales, especially in a “declining” market such as we are currently experiencing.
The actual value of the acreage can fluctuate greatly. Home prices fluctuate, too. But, usually, they stay within a range that makes it safe for banks to lend.
In recent years, the banks have had a lot of problems. They made it “too easy” for people to get a mortgage. They required very small down payments and were not too picky about people’s credit ratings. So, while land loans never fit well into their lending formula, it is even worse, today.
It is easy to repossess a car, when someone defaults on a loan. Foreclosing on someone’s home is harder. But, sometimes the bank has no choice. In either of these scenarios, the bank has a piece of property that can be resold, relatively easily. Usually, they can recover what they are owed.
A piece of undeveloped property is harder to resell. Lenders feel that borrowers are more likely to default on the loan, because they are not living on the property. If faced with a choice of paying the mortgage for their primary residence or paying off their land loans…well, you probably get the idea. The lenders are scared.
The asking price on a piece of property can be hard to understand, unless you are standing in the middle of it. It just makes sense that a seller would ask more for acreage with a mountain view or a beautiful pond.
But, that is not something that a lender, sitting behind a desk, hundreds of miles away can justify. So, even the banks that do make land loans will sometimes reject the application, because the price seems too high.
The best suggestion for anyone that wants to make this kind of purchase is to deal with a private local broker, meaning someone in the same state as the land that you wish to buy. A local bank might be willing to make a loan on an undeveloped lot in a planned community, but not on acreage for hunting or relaxation.
Because brokers have access to a number of different lenders, their chances of getting you approved are better. There are still a few lenders that offer excellent land loan products and the right broker can help you find the best one for your circumstances.
Call Carol at Peakview Mortgage today to discuss your options (719) 738-2367
