Many people dream of buying a plot of land and building their perfect home, but buying land isn’t always straightforward and can come with complications. Purchasing land is often seen as a risky investment, but it allows you to build your ideal home or even conserve your own slice of nature.
Before you set your sights on a plot of land, be sure you are fully aware of the process of buying land and the funding options available to you. Unless you are lucky enough to purchase a plot of land outright using savings or other funds, then the chances are you will need to borrow the money to fund your purchase. This guide covers everything you need to know about how to fund and purchase a plot of land.
Define Your Land Requirements
There are many reasons why people buy a plot of land, and in recent years it has been seen as an alternative to investing in property. Before you begin looking for your perfect plot and planning how to fund the purchase, you should first define exactly what requirements you need from your new land.
Consider your reasons for buying land, do you want to build your own home to live in, or build a home to sell on as an investment? Once you are clear on exactly what you need from your plot of land, you can begin thinking about your budget and how you are going to fund the purchase.
The price of a plot of land will depend on several different factors including size, location, nearby transport links and planning permission. Land sold with planning permission will always be more expensive than land without it.
Borrowing To Fund A Land Purchase
The majority of lenders will be more willing to lend to you if you have plans to build property on the land you are buying because you will be adding value to your investment. There are various funding options available to you, depending on how you are planning on using the plot of land. The most common borrowing options for buying a plot of land are:
Construction Loans: A construction loan is designed for those who want to buy land and fund a property construction. You can get one single loan for the entire project which can save on paperwork and means you won’t be stuck holding land while you look for a lender to fund the construction of your new property.
In most cases, you will need to present building plans to your lender in order to be approved for a construction loan, and funds are released over time as the project progresses through the various stages. Most construction loans are short-term bridging loans, usually for less than one year or until the project is complete.
After the project is complete then a construction loan can be converted into a standard long-term loan, or you can refinance the loan using the new property as collateral.
Raw Land Loans
Buying a plot of land that already has street access and utilities is generally much easier than buying raw land that has none of these features. It is possible to get finance for raw land, but most lenders will be more hesitant to lend for this type of land purchase.
It is very costly to add these utilities to your property when you have raw land, and it is much more likely to experience unexpected expenses and delays in the project. Typically to get approved for a raw land loan you will need to have a high credit score and a shorter loan length to reduce the risk to lenders.
No Development Plans
If you want to buy a plot of land but have no plans to develop a property or structure on the land, then getting finance will be much more difficult. You can get funding from a lender if you can provide adequate security, or if you have significant equity in your home, then you may be able to get a second charge mortgage to fund your land purchase.
Some owners of land plots may offer their own financing options, so it is always worth discussing this option with the current owner. If you are waiting for the right time to build on the land or spending some time choosing the perfect design for your home, then some specialist self-build mortgage lenders may be willing to lend to you.
The size of the down payment you need to pay to obtain funding will depend on the type of loan and plot of land you are getting. If you are choosing a construction loan on a lot of land then you will typically pay 10% to 20% upfront, but a loan for raw land will typically require anywhere between 30% and 50% because of the higher risk involved.