How Land Is Financed!
When you buy a home, there are many shapes and sizes of mortgage available. To name just a few, you may choose 1) Conventional, 2) VA, 3) FHA, 4) FmHA, 5) NoDoc, 6) FNMA 7) FHMLC and many other “hybrid” mortgages.
When buying mountain land for sale in North Carolina, especially large acreage tracts, it’s a much different story. Because land loans are not insured by the government, only a limited number of sources exist. The good news is that with loans for land the process is much simpler and much less frustrating than applying for a home loan.
Loans For Land – Traditional Lender Financing
Two primary sources of money are available for land loans: commercial banks & Carolina Farm Credit
Commercial Banks – Any commercial bank in North Carolina can be a source for a land loan, however their terms for making loans for land seem quite conservative at this time. Some may avoid land loans altogether, so it may be wise to begin with your personal or company bank.
Banks will generally make a land loan for 10 years max but, depending on your existing relationship with the bank, they may go as long as 15 years. Land loan interest rates are generally competitive, and may range from 5-8% at present, depending on whether they are fixed or variable rate land loans.
The amount of downpayment you can offer may be the single greatest “carrot” you can extend to the bank. They seem to prefer 25-30%, but some are requiring as much as 50% down. All seem to require high credit scores and credit history. You may want to get a copy of your credit report before approaching a bank. You can do this by going to www.myfico.com where, for as little as $14.95, you can get your complete credit history and score.
All banks prefer to get an appraisal before making loans for land. Again, because of the national economy and the bank’s recent experiences with real estate, and more specifically land, you may find the appraiser to be conservative with his estimate of land value.
Carolina Farm Credit – This source of lender has been, over the past few years, a very attractive source of land loans. The Farm Credit organization is national in scope with regional offices throughout the state, but they are NOT a government program. They are a “non-profit” which makes for a unique borrowing experience. This lender can make land loans of any size with terms up to 20 years. They can also lend up to 85% of appraisal land value. That translates to 15% down. They will loan based on either “fixed” or “variable” rates that are almost always competitive with banks. One of the most appealing aspects of choosing this lender is their “Patronage Fee” program. Because they are a non-profit, they approach their land loans differently than traditional lenders, i.e. commercial banks.
When you borrow and close on loans for land from Carolina Farm Credit, you are required to purchase $1,000 in stock from their organization. That is often included in the loan amount borrowed. At the end of each year, Farm Credit looks at what is normally considered their “profit” for the year. Because they are a non-profit, it is called “Surplus” on their accounting books. Early each year, they declare a surplus dividend or “Patronage Fee” which is paid back to everyone who has a loan with them. For the year 2010, for example, they declared a 23.5% “Patronage Dividend”. This means that for every dollar in interest paid in 2009 on each land loan, they paid 23.5% of it back to the person or family having a loan.
Here’s how it’s paid: In April of each year, they send a check to all individuals with loans for land (you) for 30% of the Patronage Dividend declared for the previous year. For example, let’s say you paid a total of $12,000 in interest in 2009 on your land loan. They have just declared a 23.5% Patronage Fee amounting to $2,820. You receive 30% of that – $846 – in April of 2010. The balance of 70% or $1,974 is placed in a surplus fund for 5 years. Money placed in the surplus fund is used to make new land loans to others buying land.
At the end of 5 years, usually in October of that year, they pay the remaining $1,974 back to you Thus, if you have a 20-year loan, beginning with the 5th year of your loan, you could receive a check for $846 in April, and another for $1,974 in October for the life of the land loan.
One recent couple who had a 5 7/8% variable rate loan with Farm Credit found that after receiving their Patronage Fee each year, their interest rate was actually just a net of 4.49% – quite a savings over traditional bank land loans.
Also known as “owner financed land”, this method of financing land involves the selling property owner. For example, let’s say you purchase a $300,000 property, and agree to pay 30% down or $90,000. That leaves a balance due at closing of $210,000, which would often be secured from a bank or other lender.
With this financing method, however, it is the owner/seller who agrees to take back a note and deed of trust (mortgage) from the buyer. In other words using owner financed land, the seller agrees to take payments (like a bank) for the balance of the purchase price – the $210,000.
Only a small percentage of sellers agree to owner financed land for one of two reasons. Either they still have a loan of their own which must be paid off in order to convey clear title to you, as buyer, or they need the entire sale price provided to them at closing (for many different reasons).
The benefits to owner financed land are both financial and more simple than obtaining traditional financing. Financially, for the buyer, there is no 1) loan origination fee paid to the bank, 2) no appraisal fee, 3) no credit check fee (negotiable), and 4) interest rates may be slightly lower than a bank, and 5) no special or unusual fees are being charged by a lender.
Owner financed land is also made more simple for several reasons: 1) if the Seller agrees to the offered terms, with a simple “Yes!”, your “loan” is approved on the spot, 2) you don’t have to wait weeks or longer for bank approval, 3) there’s no waiting and uncertainty about appraisals or inspections and, finally, 4) closing takes place more rapidly.
The terms of owner financed land are all “negotiable”. In other words, you can offer to buy a property using terms agreeable to you. When presented to the Seller, those terms may be accepted, rejected, or the Seller may agree subject to a different set of terms – which you in turn may accept, reject or “counter” – until all parties are in agreement.
Most often, sellers of owner financed land are most likely to accept the following set of terms: 1) a downpayment of 25-30% of the asking price, 2) the balance of 70-75% is payable amortized over 10, 20, or more years, but with a “balloon payment” at the end of 3-5 years.
By setting up an amortization period that is lengthy, i.e. 10, 15, or 20 years, monthly payments are most likely to be at a reasonable level for the buyer. By adding a “balloon payment” after 3-5 years, the Seller benefits by not having to wait a lengthy period of time to receive the balance of the loan.
By way of definition, having a “balloon payment” means that the Seller receives relatively small monthly payments for a short time, followed by one payment of the entire remaining principal balance on the loan. The benefit to the buyer using this type financing is that he or she has 3-5 years to determine a better source of financing, without having to endure the application process required by a bank up front.