If you want to buy land, consider these factors

Amid the coronavirus pandemic, more and more Americans are choosing to move away from big cities and towards suburban or rural areas. In a survey conducted by the Harris Poll, nearly 40% of U.S. adults living in urban locations considered moving away from densely populated areas. Among the real estate options that some have considered were buying land and building a house.

Before you start searching for plots of land to build your dream home, there are several considerations that you should be thinking of in terms of land use, zoning and financing.

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Factors to consider when buying land

Whether it’s raw land, unimproved or improved, buying land without an existing house means you need a land loan.

Land financing is different from a typical home mortgage as there is no home to act as collateral for the loan. Due to the lender’s risk exposure from the lack of collateral that an existing house would give, getting a land loan is always more complicated.

Land loans are also likely to have less favorable terms than a mortgage loan. Depending on the lender, there may be a substantial down payment and higher interest rates. Additionally, some land loans have shorter repayment terms than a 15-year mortgage or 30-year mortgage.

Before purchasing land, consider these three things:

1. Land use
2. Zoning
3. Financing

1. Land use

The terms of the land loan — for example, the down payment and interest rate — generally rely on the intended use of the land.

For build-ready lots, although there are things that could go wrong, cause delays or increase costs, banks generally favor these over raw land. For build-ready lots, the typical down payment is between 15% and 25%, while raw land can be as high as 50%.

2. Zoning

It’s essential to have the land surveyed and check zoning and land restrictions before presenting paperwork to a lender. For example, if the property is located on wetlands, you will need special permission to build. This process depends on state rules and regulations and whether or not the federal government has jurisdiction.

You also need to consider access to utilities. Having water, sewer, electricity and cable hook-ups ready saves you a lot of time and money. Road access is another problem to think about. You’ll need a permanent easement to access a public road if one isn’t already present.

3. Financing

And lastly, you’ll need to search for and secure financing with acceptable terms that fit your budget. There are several sources such as:

• Local banks and credit unions
• A home equity loan
• A USDA loan
• Seller financing

You need to figure out if your budget allows for financing the land purchase, as well as building a home. Aside from the cost of construction, there are land adjustments, utilities, fees and permits. Most experts advise buying land with cash, but of course, this isn’t always possible.

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Alternative to buying land

If the process of buying land isn’t feasible, you can always purchase a home or seek to refinance your current home.

Purchase an existing home

There is a range of options available for a home mortgage to suit your needs and budget. Once you are pre-approved for a home loan from your lender, you can look for a home and make an offer. A qualified real estate agent can help you during your search, along with assisting you through negotiations and paperwork. Although there are several steps to buying a house — financing, searching for homes, making offers, inspections, property valuation and closing — buying an existing home can be more convenient than buying land.

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Refinance your current home

Another option is to replace your existing home loan with a new one under different terms. Refinancing your current home might be a better choice for these reasons:

• Lower interest rates
• Replacing an adjustable-rate mortgage (ARM)
• Your credit score has improved
• You want to lengthen the loan term
• Cash-out refinance

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If you want to buy land, weigh your options

Land loans are structured differently than traditional home mortgage loans and have varying requirements. Land use, zoning and financing all play big parts in what you’ll end up paying for a plot of land. Alternatively, there’s always the option to purchase an existing home or to refinance your current home.

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