Acquiring real estate is incredibly exciting and it could potentially be very profitable, but exactly how much do you need down to buy land?
For traditional down payments on loans and mortgages, you will typically need to have around 20 to 30% of the property’s value upfront. However, there are options that could require very little money down or even none at all - depending on how you approach your land loan.
Whether you are interested in buying land to pursue a real estate opportunity or simply want to acquire a property for your private residence, buying land can be a very intimidating financial venture. The reason for this is that land purchases are usually the biggest financial decisions that people make in their entire lives, which is why you want to ensure that you play your cards right so that you can come out ahead without being in someone’s pocket. One of the most important things that you should be aware of is the different types of loans that are available to you, as there are a lot of different options that vary in how much money you need to put down on your land - with some being very advantageous and others being financially risky. To help you understand exactly how much money you need down to buy land, we are going to take you through everything you need to know about the different ways that you can get a loan for your land.
After years of working as a real estate investor, I have had a lot of firsthand experience in dealing with the different ways that you can acquire property. My experience has taught me that the amount of money that you need down to buy land is determined based on the banking institution you deal with, the terms of your loan, and your ability to be financially resourceful.
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Buying Land: Money Down Options
These days, we have so many different options for buying land, which has opened up a lot of possibilities for people to buy real estate on their own terms. The real estate market has proven to be one of the most reliable ways of earning money in the United States and presents a lot of financial opportunities for investors and even everyday citizens. The reason for this is that real estate prices have consistently gone up over the years, which makes land acquisitions one of the safest investment opportunities out there.
With that being said, buying land does come with its fair share of risks. Just like with any investment, you want to make sure that you are making a wise and calculated decision so that you can come out ahead with your land purchase. There are a lot of variables involved in this and one of the first is understanding how much money you need down in order to buy land. Luckily, there are many different money down options for you to consider, but you should be aware of the terms and conditions of any contract that you review, as the devil is in the details.
The one exception of needing money down to buy land would be to have adequate savings on hand so that you can pay for your property upfront. If you have the financial backing to buy a plot of land that you are committed to, then technically you do not need any money down to buy land and all you need to do is sign some contracts, handle your transaction, and grab the deed to your land. Unfortunately, most people do not have this option available to them, which is why you are going to want to consider the various land loan possibilities that you can utilize.
As you begin assessing your money down options, you want to be cautious with low or even no money down land loans that are out there. The majority of the time these loan options come at a price, which usually means ridiculously high interest rates that keep you trapped in debt for years. This is not a position that you want to find yourself in, which is why you want to carefully evaluate all of your money-down options before making any commitments. Let’s dive right into your money-down options for buying land.
Mortgages & Loans
If you want to buy land, the most traditional approach for doing so is to deal with a financial institution. This can be an intimidating thought for many people, as financial institutions have been known to be merciless when it comes to receiving their payments and they can be quite unforgiving if you miss one, which is why you want to ensure that you are dealing with a reliable banking institution and that you have the funds to back your loan.
The amount of money down that you need to get a mortgage or loan on your property will be determined on a case-by-case basis. As a standard, you can expect to need as much as 20 or even 30% money down of the value of the property to be considered for a loan by most financial institutions. While this is a considerable amount of money to need upfront, you should be aware that the more money that you can put down upfront, the lower your interest rates will be moving forward. You can expect to pay anywhere from 3 to 6% interest on your land loan over the next 10 to 30 years - depending on the specifications of your contract.
With that being said, you can find land loans that require considerably less money down - with some options only requiring as little as 5 to 10% money down in order to be considered. The amount of money that you will need down can often be determined based on your financial credibility, which will be based on your credit score and banking history. While less money down does sound great, you should be careful with these schemes, as they are often designed to take advantage of naive buyers, which is why it is always best to deal with a reliable baking institution.
In addition, how much money you need down to qualify for a mortgage or loan will be greatly influenced by the type of land that you end up wanting to buy. Financial institutions will evaluate the proposal for your land and will determine how much money down you need based on the classification of the property and its financial risk. Some properties are much more financially viable for banks to back, which is why the amount of money down can vary greatly depending on the classification. Let’s take a look at some different land types and their down payments.
Properties that are developed such as businesses and especially private residences are the easiest to get loans for and generally require less money down. The reason for this is that the property has equity and promising financial assets, which can serve as a safety net for you and the bank in case things don’t work out. You can expect to pay an average of 20% money down for developed property.
While vacant land may have some promising characteristics, the mere fact that the property is undeveloped means that there is more financial risk involved for the financial institution and more development costs for you as the owner. Vacant land parcels will generally require a bare minimum of 20 to 30% money down in order to be considered for a loan.
Raw land is a property that has seen virtually no improvements and will require a lot of upfront costs in order to develop. This can make raw land an incredibly risky financial investment for your bank and they will likely need to carefully consider your application to be approved for a loan. You can expect to need as much as 30 to 50% money down for a plot of raw land.
You should always consider your money-down options when dealing with a financial institution as there are a lot of different factors that play into this. While you can generalize a standard amount of money down required for a mortgage or loan, a major influence on this will be determined based on your own personal financial history. Banks tend to be much more flexible and reasonable with individuals that have their finances in order, which is why you want to be calculated and careful when dealing with them so that you are not getting a poor contract.
A highly effective approach for buying land with little to no money down is to opt for a 3-F Loan. This approach is less conventional than a traditional mortgage but it does enable you and your potential lender to have much more flexibility about the conditions of your loan, as you are often able to dictate the terms of the loan and the amount of money down required.
The way a 3-F Loan works is that you are essentially asking for money to buy land from people within your own private network. This generally involves people within your family, your friends, or even your acquaintances. The people you know are some of the best individuals to deal with when it comes to land loans, as there is much less intimidation involved in receiving financial assistance.
With that being said, a 3-F Loan is not something that you should take lightly and you should weigh out your finances just as thoroughly before you begin reaching out to people or making any kind of commitments. You want to ensure your lender that you are fully capable of paying them back their money, as they are counting on you to deliver on your promises. The amount of money down that you will need for a 3-F Loan can vary depending on the specifications of your loan agreement - with some following more traditional figures like 20% and others requiring as little as 0 to 3%.
Before you begin asking around for a loan from your family, friends, or acquaintances, you should first formulate a financial plan as well as the details of the land that you are considering. By having a professional and well-executed presentation for your 3-F Loan proposal, you can give the impression and assurance to your lender that you are a serious buyer that has credibility. This will make your lender much more comfortable with entrusting you with such a huge financial commitment. At the end of the day, if someone is going to lend you a large sum of money, they are going to want to be sure that they are dealing with someone who is financially responsible.
If you have delivered a solid presentation for your 3-F Loan and are dealing with trusted lenders, then you should both be able to sit down and come to an agreement about how much money down is required for the loan. As previously mentioned, this will vary depending on how good you are at negotiating, the amount of money you are requesting, and the person that you are ultimately dealing with. If you have properly made your case, you could be seeing money down requirement of just a few percentage points or even no money down at all. However, you may find that your lender needs a little more financial assurance from you, which could involve a down payment of anywhere from 1 to 20%+.
If you are having a hard time finding people within your immediate circle to deal with and don’t like the idea of doing business with a financial institution, you may find that seller financing is one of the best options available to you. This approach involves much more flexibility when it comes to determining the terms of a land loan while at the same time mitigating the risk of financial responsibility - with minimal money down requirements.
The way seller financing works is that instead of dealing with a bank for your land loan, you are dealing with the seller directly. You are essentially cutting the middle man out and approaching your loan negotiations with the person that is going to be selling you your property. This can be highly advantageous for the buyer and the seller as you are able to skip a lot of the obstacles that financial institutions put between you and your land.
If you are interested in buying land and want to determine the amount of money down needed on your own, you can reach out to the landowners directly and offer them a seller financing approach for acquiring their land. Much like with any major transaction, you want to carefully consider your finances so that you can make a well-calculated offer to the landowner.
Once you have weighed out your finances, you can arrange a meeting with the seller to discuss the terms of the land acquisition. It is at this stage that you can begin to negotiate the amount of money down required for the property. The amount of money that you need for a down payment will ultimately be determined by the seller. You can make offers and counteroffers that suit your financial situation, but the final call will be theirs.
Seller financing generally has a lot more flexibility with down payments and you will likely not have money down requirements that are as high as with banking institutions. Many people that take this approach end up only needing 3 to 10% money down in order to be considered for a seller financing deal, but some people can end up paying no money down at all. However, if your seller is not convinced of your financial situation and wants more assurance from you as the buyer they may ask for a down payment as high as 20%.
Home Equity Loan
If you already have a property that you acquired in the past, you may be able to utilize it as leverage for a future land purchase through a home equity loan. At the end of the day, money talks, and the value of your home is a great way to present financial accountability to a banking institution when applying for a loan.
You can apply for a home equity loan by using your current property as a bargaining chip for receiving a mortgage for another land acquisition. Before you can apply for a home equity loan, you first need to have an official figure for the value of your property. To do so, you need to hire a professional land appraiser to come to evaluate the condition and qualities of your property.
Once the appraiser has given you a dollar figure for your land, you can present this to a financial institution for your home equity loan.
The great thing about dealing with home equity loans is that you rarely if ever need to put any money down in order to qualify. However, what you will need is a certain amount of money invested into your home. If you have already financed your property, then you will have met the most important requirement for qualifying for a home equity loan. On the other hand, if you are still paying off your land then you will need to have paid a minimum of 20% of what the property is worth in order to be considered for a home equity loan.
USDA Home Loan
If you are struggling to find a land loan that requires zero or little money down, there is really no better option than the USDA Home Loan Program. The United States Department of Agriculture is not your typical lender and many people are surprised to find that they even deal in real estate - given their agricultural affiliation. However, this government organization has been helping thousands of people for years buy property with no money down at all.
The USDA Home Loan is designed to help people buy homes who are not in a financial position of dealing with a banking institution. This program has been an incredible resource for people to buy land without the financial risks that traditional loans place on their borrowers. With that being said, there are some requirements that need to be met in order to qualify for this loan. The first is that you need to be in a low-income bracket in order to be considered.
The second is that you do not have full control of where your land will be located. The reason for this is that the United States Government is trying to encourage more people to live in rural areas. In addition, the loan that you get from the USDA Home Loan Program cannot be used for anything except for a private single-family household. This means that you cannot use it to pursue a business opportunity or real estate investment.
If you meet the qualifications for the USDA Home Loan Program, then you could be in a position of acquiring a very affordable property with no money down at all. This program also comes with very reasonable interest rates that are under 3%, which makes this one of the best ways for buying land for cheap with no money down.
If you are on a budget, have small financial backing, and want to get a smaller down payment for your home, applying for an FHA Loan is a great option. The Federal Housing Administration is a government program designed to help lower-income borrowers buy a home who do not meet the requirements of a conventional loan.
The Federal Housing Administration offers some incredible loan options that require minimal down payments that can be as little as 3.5%. However, you may end up paying a down payment that is as high as 10% - depending on your financial history. The way the Federal Housing Administration determines how much money down you need is based on your current credit score when you apply.
What you will find is that the better your credit score, the less money you need to put down on buying your land. If your credit score is 580 or higher then you will qualify for the minimum down payment of just 3.5%. Whereas if your credit score is lower (between 500 and 579), then you will need to pay 10% money down in order to qualify.
If you are struggling to find a lender that can meet your ideal money down figure, then you should opt for dealing with the Federal Housing Administration, as they have the resources and connections to help you find reliable lenders that must adhere to reasonable requirements of the FHA Loan.
About THE AUTHOR
Brittany has been in the land business since 2020 when the world was starting to shut down. Since then, we’ve sold to dozens of people from ATV weekend warriors to camping enthusiasts to retired truck drivers. Our inventory spans mostly in the western United States. We’ve been trained by experience, land acquisition courses, and hundreds of hours meeting with county assessors and clerks, zoning officials, realtors, and land investors. We’ve answered hundreds of questions from people regarding the buying and use of land.Read More About Brittany Melling