How to Finance Buying Land: Should We Go into Debt?

Reader Contribution by Jennifer Kongs
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The Small Home, Big Decisions series follows Jennifer and her husband, Tyler, as they build a self-reliant homestead on a piece of country property in northeastern Kansas. The series will delve into questions that arise during their building process and the decisions they make along the way. The posts are a work in progress, written as their home-building adventure unfolds.

Neither my husband nor I stand to inherit land. Nor have we won the lottery (at least not yet, although we haven’t tried very hard). We are not sitting on piles of money, and no one has dropped off bags of money on our front porch (but if you want to, please feel free.) We did, however, find a piece of land we love, and we did purchase it.

To have enough acreage to achieve our goals within the region we wanted to live in, we knew we would need financing. We got some help from family and we had some savings, but we needed bank financing to make that chunk of Kansas our very own. (We had a period of time where I tried to get Tyler to refer to us as “land baron and baroness,” but the sparkle wore off quickly after I saw how much the land baroness owed each month for the honor of her title.) The choice to take out a mortgage is not an easy one, and it’s not the right decision for everyone. If this is the path you are considering, here are some tips from our experience. (If you want to learn from folks who’ve gone the debt-free route instead, read our Debt-Free Home Reports  from real-life readers who’ve made it work without the bank.)

1. Not all banks will do loans for “raw” land. We had to call several banks until we found one that would even lend on undeveloped property. Farm credits or banks in smaller towns in mostly rural counties are a good place to start, as they are more likely to handle these types of investments.

2. Not all banks will lend on large pieces of land. Similar to the point above, you may need to do some searching to find a bank that will lend on more than 10 acres (a common lendable property-size limit we ran into). Sometimes, banks will want you to split the property to make two separate loans, a loan for land and a loan for building a house. It sounds complicated because it is. The reason this can happen is based on rules banks set as to what percentage of the total land value the house can be appraised for. So, in our case, in order to take out a 30-year mortgage on the house we will build, we’re refinancing to have the majority of the land paid back with the original 5-year land loan, and to have the house set up on 10 acres with a separate loan. Which leads us to our next point.

3. The appraisal of your house plans and the estimated value of your acreage matter. For us, our house plans (which we have yet to finalize) must be for a home appraised to a value that is no less than 80 percent of the total value of the 10 acres we are building on and including in the home loan. So, before you buy, you should know the going rate for an acre of land in your area as well as an average per-square-foot cost to build a new home. These comparisons are good to have not just to know if you’re getting a fair price for your land, but also because it could make a difference on what kind of home you’ll be able to build.

4. Know what information you’ll need to get a final home loan. For us, we needed a whole lot of financial history and a building permit. Check on what the requirements are to secure a building permit in the county where you are planning to purchase land. The requirements can be stiff or lax from one county to a neighboring county, so it’s worth checking to see how much you’ll have to spend up front before you can qualify for a home loan. You don’t want to get caught needing to pay $10,000 to meet a county requirement before you can take our your building permit, but not be able to access your loan money to pay for said requirement until after you get the building permit that the bank requires to loan you the money. (Yes, the dream-country-home-building path can be this riddled with loopholes. But, if you tread knowledgeably, you can easily avoid them.)

If anyone has a specific question about our process or anything I wrote here, please leave it in the comments below. If anyone else has other experience or tips, leave those as well!

Next in the series: How Do We Get an Entrance Permit to Build a Driveway?
Previously: We Bought Land! Now What?

Jennifer Kongsis the Managing Editor at MOTHER EARTH NEWS magazine. When she’s not working at the magazine, she’s likely in her garden, on the local running trails or in her kitchen instead. You can connect directly with Jennifer and Tyler by leaving a comment below!

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