Can You Get a Mortgage For Land?
Buying a piece of land can be an important part of a home-buying journey, but can you actually get a mortgage for land? Yes, you can get a mortgage for land in Canada, but it works a bit differently than a regular home mortgage.
Securing a mortgage for land involves different types of loans and requirements compared to buying a home. Some options include construction mortgages, land acquisition loans, and seller financing. Understanding these options and knowing what lenders look for can help you navigate the process smoothly.
Key Takeaways
You can get a mortgage for land in Canada.
Different loan types and requirements apply to land mortgages.
Factors like location and down payment size affect eligibility.
Types of Land Loans
Land Loans
Land loans are used to buy a plot of land. They often have higher down payment requirements and interest rates. For raw land, you might need a down payment of up to 50%. Typically interest rates run at Prime +2% and amortiztion on these loans can be as low as 20 years. Not all lenders offer land loans, so it’s important to work with a mortgage broker with access to a wide variety of lenders, particularly local credit unions, if you’re seeking this product.
Construction Mortgages
These loans cover both buying the land and building a home. They are ideal if you plan to start construction immediately after the purchase of the land. Construction financing comes with a different timeline and set of rules than regular financing, check out our comprehensive construction financing page!
Agricultural Loans
Used for farming or agricultural purposes, these loans usually require collateral and have specific terms based on farm income and productivity.
Second Mortgages
These loans are taken out against the equity of an existing property. You can use the funds to purchase additional land without selling your current home.
Seller Financing
In this case, the land seller provides the financing. This can be more flexible but may come with higher interest rates, and it’s overall very uncommon to find.
Applying for a Land Mortgage
Preparation Steps
Before applying for a land mortgage, you need to assess your financial readiness. Check your credit score and report for any discrepancies. Having a high credit score can improve your chances of getting favourable loan terms.
Determine the amount needed for a down payment. Land loans often require higher down payments compared to home mortgages, sometimes up to 50%.
Research and gather information on different lenders, or work with a mortgage broker who can compare rates for you. Compare their interest rates, terms, and conditions. Some lenders might specialize in land loans or offer better rates for particular types of land, such as agricultural or residential plots.
Required Documentation
To apply for a land mortgage, you must gather several important documents. These typically include proof of income, such as pay stubs or tax returns, and a list of your current debts and assets.
You will also need to provide identification documents like a driver's licence or passport and proof of the land's value. An official appraisal might be necessary to establish the land's market value.
Additionally, if you are purchasing the land for specific purposes such as building a home or starting a business, you may need to submit plans or business proposals to the lender.
Navigating the Application Process
Once your documentation is ready, complete the lender's application form. Fill it out carefully, providing accurate information. Submit all necessary documents along with your application.
Engage with the lender throughout the process. Be prepared to answer any questions they might have about your financial situation or future plans for the land. This can help build trust and potentially improve your loan terms.
Lastly, review the loan terms and conditions thoroughly before signing any agreements. Understand the interest rates, payment schedule, and any additional fees that may apply.
Navigating the land mortgage application process requires careful preparation and attention to detail. Completing each step diligently increases your chances of securing the loan you need.
Factors Affecting Land Mortgage Eligibility
When considering a land mortgage, several factors can influence your eligibility. These elements are critical for lenders to assess the risk involved in lending.
Credit Score: Your credit score plays a significant role. A high credit score can help you secure better interest rates and favourable loan terms.
Land Location: The location of the land is essential. Land in urban or developed areas usually has a higher chance of approval. Remote or undeveloped lands can be riskier for lenders.
Type of Land: Lenders will consider the type of land you're purchasing. Agricultural, residential, and commercial lands each have different risk levels and may affect your eligibility differently.
Down Payment: The amount of down payment can impact your eligibility. A larger down payment often reduces the lender’s risk, making it easier to qualify.
Income and Debt Ratio: Your income and current debts are crucial. Lenders will look at your debt-to-income ratio to ensure you can handle the mortgage payments.
Loan Duration: Land mortgages might have shorter terms, typically ranging from 5 to 15 years. This can mean higher monthly payments, which can impact your eligibility.
Land Appraisal: A professional appraisal helps determine the land's value. This value is critical for determining the maximum loan amount you can qualify for.
Economic Factors: Broader economic conditions can affect interest rates. Higher interest rates could impact your ability to meet monthly payment requirements.
Financing Options and Interest Rates
When seeking a mortgage for land in Canada, it's important to understand the types of loans available and the factors that determine the interest rates you may be offered.
Conventional Mortgages vs. Land Loans
Conventional Mortgages
Conventional mortgages are often used for buying homes, but they are different from land loans. When purchasing land, particularly large or undeveloped plots, a conventional mortgage may not be available. Instead, specialized land loans are provided to cater to these purchases.
Land Loans
Land loans generally require a larger down payment, often ranging from 30% to 50% of the land's value. This is because lenders consider land to be a riskier investment compared to homes. If the land is serviced, meaning it has access to services like water and electricity, the down payment requirement may be lower.
Determining Your Interest Rate
Interest rates on land loans tend to be higher than those on conventional mortgages. This is due to the perceived risk and uncertainty associated with land purchases.
When you’re running number to evaluate the viability of a land purchase you should be using Prime +2% as a minimum interest rate in your calculations.
Apply for a Land Mortgage Today
The first step in any mortgage journey is a preapproval. Once you apply for a preapproval, your mortgage broker will have the information they need to give you advice specific to your situation.
The mortgage experts at Spire Mortgage are experienced in land mortgages and can help you get a mortgage to fit your needs.
