Owner Financed Land: Essential 8 Things You Need to Know
Financial institutions typically aren’t eager to lend to people who want to buy raw land. This is where owner financed land comes in. Just like a conventional mortgage, owner financing involves making a down payment and paying out the rest over a previously-agreed time. While owner financing often requires some form of a background check, it can help otherwise unqualified lenders achieve land ownership. With owner financing, the buyer can break down the cost of the land into a number of affordable monthly payments, which can subsequently be balanced out by finding unconventional ways to monetize vacant land.
Whatever your reason for being interested in owner financing, here are eight things you need to know before buying owner financed land.
The Land Seller Might Require a Credit Report
One of the most significant benefits of buying owner financed land is that even people who wouldn’t qualify for a traditional loan can get flexible payment terms and become land owners. However, you should be aware that the seller could require a credit report, as well as employment history and references. This information will help them determine whether you qualify for the loan. If avoiding credit checks is why you’re looking to purchase owner financed land, it’s best to be upfront with the seller and present other evidence of your ability to pay.
Alternatively, you can avoid the credit check altogether when working with professional land seller companies such as DiscountLots. Our team handles all decisions regarding qualifications internally without credit checks or a formal underwriting process.
Owner Financing Has Negotiable Payment Terms
Depending on the type of loan, down payments with conventional mortgage lenders might be as high as 50%. In owner-financed sales, down payments may be 20% or more. But, even though the seller can ask for a higher down payment than a mortgage lender in order to cover the risk, the terms are usually negotiable. For instance, at DiscountLots, the down payment can be as low as $1! Additionally, if, for some reason, you can’t pay on a particular month, just let us know, and we’ll approve the skip request.
You Can Avoid Paying Closing Costs Altogether
With an institutional lender, there are a variety of closing costs and fees. In fact, lender fees are often the most expensive component when buying land. On the other hand, there are no bank fees with seller financing options because no bank is involved. As a result, you can save money on appraisal fees, credit report fees, recording fees, origination fees, and more. To top it all off, there’s no need to hire a realtor when buying land for sale by owner, which means you can save on realtor fees.
The Land Buying Process Is Faster
You might be surprised by how long it can take an institutional lender to process the loan if this is the first time you’ve bought a piece of property. But with owner financing, there’s no waiting for a bank’s loan officer, underwriter, and legal department to approve your application. With no middleman, there’s just the buyer and the owner, both parties eager to complete the transaction. As a result, you can close more quickly and take ownership of the property earlier.
Double-Check If There Are Baloon Payments
Nobody wants to be liable for something for twenty years or more. That’s why most owners want to be paid out after a few years. This is when a balloon payment enters the picture. It’s something you should look into before buying a piece of land that is being sold as owner financed land. A balloon payment is a final loan payment made in one big sum. Usually, monthly payments are made for a specific time under this sort of arrangement before the remaining principal sum is paid.
You can pay the last installment by selling the property, refinancing, or using your own funds. Because it frequently boosts the return for the investors, this clause is rather typical in owner-financed contracts. Luckily, going through DiscountLots means avoiding this type of unpleasant surprise. The payment terms are completely flexible and at a pace that suits your needs.
Ensure You Can Afford the Owner Financed Land
Whether buying owner financed land or using a traditional loan, you must be sure you can afford to pay for the land before starting the process. Otherwise, you risk losing the money you’ve invested into the property. If you can’t finance the land fully, it’s a good idea to at least have a solid plan on how you’ll make the payments.
Double-Check When and If You’re Allowed to Build
When buying land, chances are you’ll want to build something on it. Whether it’s your dream house or a profitable business establishment, you must ensure that the land can be used for your intended purpose. In addition to zoning laws and physical environment factors, the owner might put some constraints on how you’ll use the land. For instance, they might require you to pay at least 75% of the property before you can build on it. This is a way to protect themselves in case you default on your payments. They don’t want to be left with having to demolish your structure to resell the parcel. By buying land through DiscountLots, you can skip this step and start using your land right away.
Ensure There Are No Prepayment Penalties
If a borrower pays off a loan before a certain number of years have passed after taking out a loan, they will be charged a prepayment penalty, often known as a “prepay.” Lenders impose these fees in order to prevent borrowers from paying off or refinancing their mortgages. It would result in the lender losing out on interest income.
Buying Owner Financed Land: Final Thoughts
Owner financing is a way to own land faster than if they applied for standard financing. Buyers with low credit scores or other qualifying issues often benefit from this method of financing. Unlike traditional owner financing options, DiscountLots offers flexible payment terms with a down payment as low as $1. Also, there’s no credit check or formal underwriting process. Plus, you can own the land outright at the end of the land agreement with no balloon payments!
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