How do you use a land acquisition loan?
- Definition of Land Acquisition Loan
A land acquisition loan is a mortgage that is used specifically for the purchase of new, undeveloped land. Lenders consider raw land to carry more risks when it comes to financing and, as a result, not all lenders will offer loans for this type of property purchase. With a land acquisition loan, you work with a lender who appreciates the risk and still see the potential of developing and building on undeveloped land.
Why is this term important?
If you opt to buy raw, undeveloped land you will not be able to secure a conventional mortgage. Instead, you will need to discuss your options with lenders who are more open to land acquisition and development.
Most conventional mortgage lenders do not offer land acquisition loans. Instead, a buyer will need to seek out a credit union, mono-lender, specialized bank or private lender that is experienced and willing to loan money for the purchase of land.
As a borrower, keep in mind there are three phases of the lending and building process and each phase is financed through separate loan agreements.
The first is the land acquisition loan, which is used to help purchase the raw land. Next is the development debt financing, which is a loan used to pay for soft building costs, such as architectural plans and surveys, as well as infrastructure costs. Finally, there are construction loans, which are used to pay the actual build costs.
Examples of term
As a Lower Mainland, B.C. renter you are not excited about the prospect of taking on a large mortgage to own an urban property. Instead, you want to buy land on the Sunshine Coast and build your dream home. While you may need as much as 50% of the raw land purchase price, you can get financing through some lenders to help purchase the land where you want to build your dream home. This lender would be offering a land acquisition loan.