Purchasing real estate is one of the biggest - if not the biggest - investment you will ever make. It's a big financial commitment, and it is important to be backed by a lender you can trust. Whether you plan to purchase farm and ranch property or a permanent residence, there are a few important differences to know when getting a land mortgage or a home mortgage.
Understanding Mortgages
A mortgage is a large sum of money lent to purchase real estate. The loan will be paid back over a select period of time, either 15 or 30 years, with either a fixed or adjustable interest rate. Certain loans only apply to certain property types. Before applying for a loan, it is important to know what you plan on purchasing, so your lender can help put you in the right direction.
When looking at the difference between a land mortgage and a home mortgage, there are several differences to think about. Your loan type will vary if you plan on buying land and building a home on the property, or if there is a pre-existing structure. Will you be renovating the current home? These questions will all need to be addressed before applying for a loan.
What is a Loan Mortgage?
There are several different options when it comes to a home mortgage. The type will depend on your personal circumstance, finances, and the home you want to purchase:
- Conventional loans are typically appropriate for any type of home. If you plan to purchase a home and fix it up, this is a great option if you can afford it.
- FHA, VA, and USDA loans are government-backed loans with more flexibility for the down payment but more strict rules for the type of home that can be purchased. The home must pass an appraisal and meet certain safety guidelines set forth by the government organization you are getting your loan from.
To qualify for an FHA loan, you must have a FICO credit score of at least 580. A USDA loan is for properties in rural areas. These types of loans are typically a little smaller and will require a FICO credit score of at least 640.
Past and current members of the military are eligible for VA loans. Credit scores can vary, but the required number is anywhere from 580 to 620, depending on the lender.
Down Payment
The required down payment will depend on the type of loan you qualify for. Conventional loans need at least a 5% down payment. This can be difficult for some people because once the closing costs are added to the purchase, this can be a very high number.
For homebuyers who may not have such a large amount of funds available, government-backed loans are a great option. With FHA and USDA loans, the down payment could be as low as 0% if certain stipulations are met.
The VA does not require a down payment but check with your lender to see if they do. This will differ from person to person and lender to lender.
Interest Rates
One of the biggest factors in determining the interest rates is your credit score and financial history. A low credit score will yield higher interest rates for most homebuyers, regardless of the type of loan.
FHA loans and USDA loans generally have competitive interest rates but pay attention to the mortgage insurance that will be tacked on to your monthly payment.
VA loans are known to be very competitive with interest rates, but be sure to shop around. Each lender can offer something different, and it is important to know your options.
Land Mortgage
If you have plans to purchase a tract of land for farm and ranch purposes, your land loan will be a little different than one for a home. Land is considered to be a riskier investment for lenders because on raw land; there is no home to act as collateral in the event the mortgagee defaults on the loan. In addition to this, there will also be a larger amount of upfront costs with raw land. This can include installing electricity, a septic system, drilling a well, and any costs associated with obtaining a survey and easement if needed.
Down Payment
When it comes to a land mortgage, the down payment will be anywhere from 25% - 35% dependent upon the condition of the property. The required amount will vary depending on if the property has a home on it or if it is unimproved. The less improved the land is, the higher the down payment will be. Unlike a home mortgage, there are not many types of loans that can be used to purchase a property. This means that while it is important to shop around for the right lender, there won't be much wiggle room in the down-payment, regardless of who you choose
Interest Rates
Just like with a home mortgage, interest rates will vary from person to person. Credit score and financial history will play the largest role in determining your interest rate. Your plan for the land will also play a part. If you plan to build on the property right away and can provide solid proof of this, you may score better terms than someone who is buying the land and does not plan to build right away or at all.
Choosing the Right Financial Institution
If you are wondering how to get a land mortgage, look no further than Farmers Bank. The most important thing when it comes to applying for a mortgage, whether it be a land mortgage or a home mortgage, is to make sure you trust the financial institution you chose.
Farmers Bank has been successfully providing agriculture loans since 1917. They are well-versed in all things loan-related and are ready to help you take a step in the right direction.
Contact them today to speak with a member and learn what your options are for your home or land mortgage