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What Property Buyers Should Know About Land Loans
(TNS)—If you’re thinking about buying land, you’ll be hard-pressed to persuade a mortgage lender to finance your purchase. Instead, you’ll likely need to apply for a land loan.
Land loans aren’t as common as mortgage loans, so your options may be limited. Also, because of different factors, you could end up with a shorter repayment period and higher down payment and interest rate than you’d find with a mortgage loan.
So, if you’re considering getting a land loan, it’s important to know what you’re getting yourself into and what options are available to reduce your costs.
What Are Land Loans?
Land loans are a type of credit you can use to buy a vacant lot to eventually build a home on or raw land that you don’t intend to develop.
Land loans tend to be riskier for lenders than mortgage loans, says Casey Fleming, a mortgage adviser with C2 Financial Corp. in San Jose, Calif. Because of that, you may not get as favorable terms as you might get with a mortgage loan.
“Owners of raw land are much more likely to stop making payments and walk away from the property in the event of a financial event in their lives,” Fleming says. “And land is much harder to sell (than a home).”
That’s primarily because the demand for land is smaller than the demand for new and existing homes. So, if a lender needs to foreclose on the land, there’s no guarantee it will get its money back in a timely manner, if at all.
As a result, some lenders require a substantial down payment and charge high interest rates on land loans. Also, some land loans have significantly shorter repayment terms than a typical 15- or 30-year term you might get with a mortgage loan.
5 Land Loans to Consider to Finance Your Land Purchase
There are five common types of land loans you can get to finance your land purchase, each with its own terms and features.
- Lender Land Loans
Community banks and credit unions are more likely to offer land loans than large national banks. Your best bet is to find a lender with a presence near the land you want to buy. Local financial institutions know the area and can better assess the value of the land and its potential.
If you’re leaving the land undeveloped, interest costs will be very high, Fleming says. Plus, a lender could require a down payment as high as 50 percent.
Some lenders, however, may be willing to take a lower down payment and charge lower interest rates if you have plans to build on the land soon. So, shop around before you apply.
Also, local lenders are more likely to offer longer repayment terms, giving you more time to repay the debt.
- USDA Rural Housing Site Loans
If you’re planning on building a primary residence in a rural area, the U.S. Department of Agriculture (USDA) has a couple of loans that can help.
Section 523 loans are designed for borrowers who plan to build their own home, while Section 524 loans allow you to hire a contractor to build the home for you. Both loans are designed for families with low to moderate income, and they have a repayment term of just two years. Interest rates, however, can be low. Section 523 loans, for instance, charge just 3 percent, while Section 524 loans charge the current market rate.
Depending on the situation, you may even qualify for a loan with no down payment.
- SBA 504 Loan
If you’re a business owner planning to use the land for your business, you may qualify for a 504 loan through the U.S. Small Business Administration (SBA). With a 504 loan, you, the SBA and a lender help contribute to the costs of the land purchase:
- The SBA provides a loan for 40 percent of the purchase cost.
- A lender provides a loan for 50 percent of the purchase cost.
- You contribute 10 percent in the form of a down payment.
SBA loans come with a 10- or 20-year repayment period, and the interest rate will be based on current market rates. The terms of the loan you receive through the lender can vary, however, depending on which lender you choose.
- Home Equity Loan
If you have an existing home with significant equity, it may be worth getting a home equity loan instead of trying to get a land loan. There’s no down payment on a home equity loan. What’s more, you can typically get a low interest rate—regardless of what you plan to do with the land—because your home secures the loan.
The downside is that if you default on the loan, you could lose your home. Also, since you’re not using the loan to buy, build or substantially improve the home used as collateral, you can’t deduct the interest you pay when you file your taxes.
Depending on the lender and the loan, your repayment term could be anywhere between five and 30 years.
- Seller Financing
In some cases, the person or company selling the land may be willing to offer short-term financing. In many cases, the seller isn’t in the lending business and doesn’t have a broad portfolio of loans like a community bank or credit union.
As a result, you can typically expect high interest rates and a high down payment. Also, it’s unlikely you’ll get a long repayment term. So, consider this option if you can’t qualify for any other type of land loan.
How to Find the Right Land Loan for You
There’s no single best land loan out there for everyone, so it’s important to shop around to find the best one for your situation. Before you do anything, Fleming recommends developing a comprehensive plan for what you plan to do with the land. Doing this can help you determine what type of loan is best and how long you want the repayment term to be.
Keep in mind, though, that some lenders may have limits on how much they’re willing to finance. Others, Fleming says, may require a balloon payment, which is a large, one-time payment at the end of the loan term. “So, you may have to have a plan to pay it off before that payment comes due.”
As you consider your different options, make sure you choose one that fits within your budget and helps you achieve your ultimate goal with the land.
©2018 Bankrate.com
Distributed by Tribune Content Agency, LLC
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Experts Weigh In: Here’s When You Should Reach Key Financial Milestones
(TNS)—Maybe you have an idea of when you’d like to buy your first home or retire from the workforce—but just how realistic are your expectations?
We recently asked Americans to tell us the ideal ages for accomplishing certain financial goals. Then, we ran their responses by 10 certified financial planners living in different parts of the country.
Americans’ expectations overall were fairly realistic—but some experts argue that when it comes to hitting key milestones in life, age is arbitrary. What’s more important is whether you’re financially ready to make certain decisions, says Jennifer Faherty, founder of Financial Wealth-Being.
Getting Your First Credit Card
The ideal age to open a first credit card is 22, Americans say, but according to many financial planners, the sooner you start building credit, the better.
“I think 22 is a little late,” says Dana Twight, a certified financial planner based in Seattle. “I think you want to help your kids or your independent kids and support them in opening a card when they’re young enough to benefit from a parental safety net, if that’s possible.”
Parents who want to teach their children how to use credit cards responsibly at a young age can help them sign up for a secured credit card. These types of cards require you to make a cash deposit that becomes your credit line. With time, you should have the opportunity to trade in your secured card for a traditional, unsecured credit card.
Another option is to make a teenage child an authorized user on a parent’s account—but any mistakes that are made can impact the parent’s credit score.
Lucas Casarez, founder of Level Up Financial Planning in Fort Collins, Colo., used to help clients open their first credit cards when he worked at a credit union. Many of the people he helped were 18 and 19 years old. He sees nothing wrong with someone that age having a credit card, as long as they have someone showing them the right way to use it.
Quentara Costa has a different opinion. She’s seen too many college kids with credit cards getting themselves into trouble. Waiting until you’re 22 to open a credit card is a safer bet, says Costa, a certified financial planner in North Andover, Mass.
Waiting to Buy Your First Home
While there may be benefits to getting a credit card at a younger age, postponing the purchase of your first home may be advantageous.
Americans, on average, say 28 is the ideal age to become a homeowner, but many experts recommend waiting until you’re in your early 30s to take the plunge.
Once you graduate from college, Helen Ngo thinks it’s best to wait at least 10 years before buying a home. That way, you have a better idea of where you stand financially and whether you can take on a mortgage.
“At 28, to me that’s still a very young age,” says Ngo, CEO and founder of a financial planning practice in Atlanta. “I think those who are able to buy a home at 28 are married at that age and they have dual income to be able to afford a house at age 28.”
Unless you’re in a stable financial position and you have access to a lot of cash, it’s probably best to avoid buying a home until you’ve paid off your student loans, says John Piershale, a wealth adviser in Crystal Lake, Ill.
Homeownership Is a Long-Term Commitment
Generally, buying a home at any age isn’t a good idea if you’re not planning to stay there for at least five years. That’s particularly the case if your goal is to build home equity, Ngo says.
“If you’re purchasing a home, how much time are you going to live in there in order to get the actual equity value out of it? Unless you buy a fixer-upper and you put more money into it, and then you’re able to sell it real quick and you might make $100,000 extra out of it…but most people aren’t doing that,” Ngo says.
Even if homes seem affordable where you live, think beyond the cost of the mortgage when deciding whether to become a homeowner. Factor in the cost of property taxes, home repairs and unexpected expenses. Think about the costs involved with selling the home, too, like paying closing costs.
You’ll also want to consider market conditions. Percy Bolton, founder of a financial planning company in Pasadena, Calif., says he wouldn’t buy a home right now because it’s a seller’s market.
“You don’t ever buy in a market like this. You wait,” Bolton says. “If I was advising a client right now, it’s cheaper to rent.”
Saving for Retirement
Americans say the ideal age to start saving for retirement is 22. According to the financial planners we polled, it’s best to start saving as early as possible. The average age the experts suggested was 21.
Costa says it’s important to start saving money at a young age, but starting to save for retirement as a teenager isn’t necessary.
“When you’re younger, you do need to save for things like a car and a down payment and college,” says Costa, founder of a company called Powwow. “I think there’s plenty of time to catch up. I’ve seen plenty of people turn the corner where they haven’t had much savings because they’ve had all these milestones and at 40 they’re finally able to get serious about retirement and they’re fine.”
Lauryn Williams, a four-time Olympian who founded her own financial planning company, says you can start saving as early as age 19 in a Roth IRA. The stereotype of the broke college student is misleading, she says. Even college kids have money that they could be saving.
“Once you get in college, that first year get settled, but then also get saving,” Williams says. “Automate that saving from the very beginning, create that habit and you’ll finish college with a little nest egg for yourself and a little nest egg for retirement.”
Another recent Bankrate survey found that millennials prefer cash over stocks, but when it comes to preparing for the future, having mostly cash investments will ultimately cost you.
“A far as long-term savings, that’s not a viable strategy to me,” says Donovan Brooks, a certified financial planner in Saint Joseph, Mo. “Based on probably the retirement lifestyle that they have in their mind, cash likely isn’t going to get them to where they need to be long-term, unless they have a large income and they’re putting away a ton of money and they envision a very minimal, inexpensive retirement lifestyle.”
The Ideal Age to Retire
Americans say the ideal retirement age is 61, but the financial planners we surveyed agreed that retiring at 61 wasn’t realistic for most people. What’s more, the way people think about retirement is changing.
“I think if you redefine what retirement means, you can retire at different stages in your life,” says Ngo, founder of Capital Benchmark Partners.
Ed Leach, a certified financial planner in Wayne, N.J., says he has clients who are executives and business owners. They sell their businesses and “semi-retire” by doing consulting work.
Other financial experts say their clients are retiring later by choice. Sixty percent of her clients would list 70 as their ideal retirement age, Williams says. If you love what you do, you don’t have to stop working.
Working until you’re 70 or 80 may be more possible today than in the past now that more people today have white-collar jobs, Leach says.
“As we become less of a manufacturing, production-type of country, and jobs transition into more of, ‘Hey, I can work from home and do computer coding,’ I can do that until I’m 80 years old if my mind allows me to do it.”
©2018 Bankrate.com
Distributed by Tribune Content Agency, LLC
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Ask the Expert: How Can I Assist My Buyers in a Seller’s Market?
Today’s Ask the Expert column features Dan Steward, president of Pillar To Post Home Inspectors.
Q: When guiding clients through the real estate process, how can I ensure that they’re prepared to find success when in the midst of a seller’s market?
A: Pillar To Post Home Inspectors® enjoys a leading position in its category. As such, we have nearly 600 franchisees performing thousands of home inspections, and we gather a myriad of great tips from them. Here are some of their best tips for making sure your buyers are prepared—and positioned to be the most attractive bidder in a competitive seller’s market.
- If your client isn’t going to be a cash buyer, make sure they get a pre-approval for a mortgage before looking for homes in their price range.
- When putting together an offer, it helps if there are no contingencies involved, such as waiting for the client’s home to sell first. In the event that multiple offers are involved, it pays to be flexible in many areas, including—but not limited to—move-in date.
- Work with your client to determine what they really need in a home versus what they really want. If inventory is tight, they may need to compromise.
- Show your client that you’re committed to being in their corner and take the time to educate them in regard to everything they need to know as they make their way through the process.
- Encourage your client to act quickly, as they’re bound to run into others who will not hesitate to make a move in a competitive market.
- Be sure your client has all their documentation ready in case of a quick close. It’s also important to make sure they know exactly what they need to have in order, should they encounter a tight timeline.
- Line your client up with the most reputable home inspector you can find so that they’re ready for the inspection. While there’s typically a period that ranges from 7-10 days to complete the inspection, be sure to remind your client that the tighter market may have sellers expecting an even quicker turnaround.
- A home inspection is a prospective buyer’s most powerful negotiation tool, as well as the most valuable insurance one can ever get on a property, which is why the Federal Housing Administration (FHA) requires a special form entitled “For Your Protection: Get a Home Inspection” with every contract. More often than not, there won’t be much to see on the inspection report, but if your client happens to write an offer on a home with an issue that needs to be addressed, you may save both yourself—and your client—a lot of heartache with this simple report.
For more information, please visit www.pillartopost.com.
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What Is a Jumbo Mortgage and When Do You Need One?
(TNS)—Home prices have shot up in some areas of the U.S., to the point where buyers need jumbo loans to finance them. In mortgage-speak, jumbo refers to loans that exceed the limits set by the government-sponsored enterprises (GSEs) that buy most home loans and package them for investors.
Jumbo mortgages, or jumbo loans, are those that exceed the dollar amount loan-servicing limits put in place by GSEs Freddie Mac and Fannie Mae. This makes them non-conforming loans.
As of 2018, these limits are $453,100 in all states except for Alaska, Guam, Hawaii and the U.S. Virgin Islands, where the limit is $679,650. The conforming limit is higher in counties with higher home prices, so be sure to check your area’s loan limits.
The maximum loan amount varies by lender. Borrowers can get fixed- or adjustable-rate jumbo mortgages with various term options. The mortgages can be used for primary homes, as well as for investment properties and vacation homes.
How to Qualify for a Jumbo Mortgage
Jumbo lenders usually have stricter underwriting guidelines. The main reason for this is that they’re not backed by Fannie or Freddie, so they’re riskier loans. On the flip side, lenders have more to gain since the dollar value is higher and they can offer additional services to these wealthier customers.
The three common hurdles borrowers must clear to get jumbo loan approval are larger income, higher credit scores and greater reserves, says Robert Cohan, president of Carlyle Financial in San Francisco.
“To consider a jumbo loan the FICO scores have to be higher. The average is around 740, although I have seen some as low as 660,” Cohan says.
Borrowers whose scores fall beneath the normal requirements usually have to offset it with a low debt-to-income ratio.
“If you’re high-leveraged and you have a low credit score, it’s going to be hard to get a jumbo loan,” Cohan says.
Borrowers should be prepared to show enough reserves, or assets, to cover between six and 12 months’ worth of mortgage payments. The down payment on jumbo loans is, on average, between 10 and 20 percent.
“Anything lower than a 10 percent down payment and you’re probably going to pay for it in higher rates,” Cohan says.
What Are the Benefits of a Jumbo Mortgage?
The main benefit for borrowers is that a jumbo mortgage allows them to go outside of Fannie and Freddie limitations. You can still get a competitive interest rate and finance the home of your choice without being restricted by the dollar limit on conforming mortgages.
The rates on jumbo mortgages fluctuate and may be higher or lower than the conforming mortgage rate. Recently, a 30-year jumbo rate was 4.62 percent, eight basis points lower than a conventional 30-year fixed rate of 4.71 percent.
Jumbo loans are a convenient way to finance property. Instead of getting two conforming loans to finance a home, the jumbo option eliminates that need. Some borrowers prefer to finance more of the home’s cost rather than tying up cash, making the jumbo mortgages a helpful financial tool.
©2018 Bankrate.com
Distributed by Tribune Content Agency, LLC
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