Owning a piece of property often means there are a few dreams wrapped up in it. The dream might be a new home you want to build. For others it might mean a few acres for a small hobby farm. And for others it might mean expanding a large farming operation.
Your dream or intended purpose for the land use gives a clue to the type of acreage and the type of financing you may want to consider, says Miles Hamrick, Farm Credit loan officer. “Lot loans are typically designed for future construction of a dwelling, usually on 10 acres or less. Farm land is usually 10 acres or more. Both are real estate transactions and both require purchase contracts but there are differences.”
One of the key differences is the lending type they fall under, says Rebecca Wood, Farm Credit loan officer. “Any consumer purpose loan that is tied to personal use, such as a home or vehicle, requires certain disclosures and timing requirements that are not required on property that is more commercially oriented, such as farm land. We want to be sure that we disclose and accommodate timeframes appropriately to protect the borrower.”
While it may seem that land is land, zoning and use can vary from county to county and state to state, explains Wood. “You can have what are considered ‘lots’ for a person’s home that may be up to several acres in size. On the other hand, some farming operations, particularly greenhouses or some specialty crops, may require less land to qualify as a farm.”
The location and use are key pieces of information to share with loan officers to enable them to provide disclosures, if needed, and to not slow the process if they are unnecessary. In fact, a visit with a loan officer can be a wise stop when first considering the purchase of land. Loan officers often have their fingers on the pulse of local markets and what land is appraising for. This can be a big help, particularly if you are purchasing land in an area that’s unfamiliar to you. If the seller is asking above what land is typically selling for, the loan officer can give you some feedback on what to expect.
For any land purchase, plan on a down payment typically in the range of 25 percent. The amount of the required down payment can be higher or even sometimes lower depending on credit risk and the nature of the land being purchased. Carolina Farm Credit will loan 75 percent of the purchase price or the appraisal, whichever is less. This applies to both lot and land loans. For example, if you’re buying $100,000 worth of land and it appraises for $100,000 then you will need to plan on $25,000 down plus your fees. The loan will be for $75,000. “But if the land appraises for only $80,000,” says Hamrick, “you will have to come up with a lot more money than you had anticipated because the loan amount will only be 25 percent of the $80,000.”
Down payments can also vary depending on whether currently owned land might be used as collateral to go toward the down payment. Sometimes a down payment may be a combination of cash and land, or land only, depending on circumstances.
While lot loans are limited to a 10-year term, land loans can be up to a 20-year fixed rate. Requirements may vary depending on circumstances but the basic paperwork to have available when meeting with a loan officer are tax returns, balance sheets and pay stubs. In some cases, a land survey will be necessary. Talk to your local Farm Credit loan officer for more details on land purchases.
This guest post is courtesy of Carolina Farm Credit. Carolina Farm Credit is a stockholder-owned cooperative providing financing to full and part-time farmers and agricultural-related businesses and also provides financing for the construction and purchase of homes in 54 counties through 32 branch offices. Other financial services available are credit life insurance, appraisal services, leasing programs and financial planning. For more information, please visit www.carolinafarmcredit.com.