Mortgage Financing for Vacant Lots & Raw Land

Understanding How to Finance Undeveloped / Bare Land or Vacant Lot

This page is for for you if you are looking to acquire a vacant lot, lake lot, small acreage, or other bare land (up to 160 acres) intended only for your **residential use** (not commercial), whether for immediate development or to hold for future development.

Please note, often acquiring vacant land is an intermediate step to a larger objective, that being developing the land with a residential home. To that end, we have developed a comprehensive Mortgage Financing Guide for Developing Vacant land, where we discuss your Cash, Experience, Property and Mortgage Requirements. If you would like to consult on vacant land, there are consultation links to follow as well as a form at the bottom of this page where you can initiate that request. Please read this page carefully first.

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Down Payment Requirements (Please Read Carefully)

Transaction Fees

1. Appraisal Fee - an appraisal will be required by the lender normally at your expense. In town, the cost might be $350. Rural appraisals with travel time, expect $400-$550
2. Legal Fees - legal fess are part fixed cost and part variable depending on the land value and land title fees, budget $1200-$1500
3. Brokerage Fee - land loan lenders do not generally compensate mortgage brokers as they do with home mortgages. Generally, our success-based brokerage fee starts at $1500 up to 1% of the loan amount and depends on the deal complexity. If some lender compensation is available, we may be able to reduce that fee accordingly.
4. Land Transfer Tax - applies in all provinces except Alberta and Saskatchewan, budget 1%
5. HST/GST may apply when you are purchasing the lot from a developer for example in a new subdivision, budget 5-7%. Personally held property may be exempt.
6. No cost for a consultation.

Further discussion on this topic ...

1) For city/town lot acquisition and immediate development, builder contract and permits in-hand. If you are acquiring the land and developing it immediately (via builder, contractor, or self-build) with a new home construction mortgage, and the vacant lot is urban or sub-urban in a desirable area, your down payment may be as little as 20% (on exception), likely at least 25%, and potentially as high as 40%.

If you have hired a builder under a fixed-price contract, and the builder agrees to acquire the lot on your behalf in order to start the build, your down payment can be as little as 5% on a CMHC-insured draw construction mortgage.

2) For city/town lot acquisition, no building plans or permits in-hand yet. If you are acquiring a sub/urban lot to hold (but yet to pin down your building plans or development date) your down payment is likely 30 to 35% of the land's appraised value.

3) For rural land purchase, no building plans in-hand yet. As your lot or land location becomes less urban and more remote, the default down payment is 50% of the land's appraised value with most land lenders. This is especially true of land with seasonal access. However, on occasion and very location dependent ~30% down might be available but we need to know exact location and an MLS listing #.

Before reading further - please re-read above and identify your likely down payment requirement. We get so many information requests and inquiries from people looking to buy land with insufficient down payment that it is hard for us to respond to all. Please do the math.

Why Are Down Payments so High?

For lenders, undeveloped land loans are riskier especially when the property isn't immediately being used for housing, because the resale opportunities are much lower and there is a future risk of land-use zoning changes.

In other articles of mine, you will see a reoccurring theme relating to the lender's mindset - if the owner fails to pay the mortgage, and lender has to foreclose, how fast will the property sell and will the lender get their money back? How fast a property will sell depends on the land properties and location, its zoning, market conditions at the time. Depending on these increased risk factors, down payments and interest rates may be higher for land loans than for housing mortgages.

• As a general rule, the more expensive the lot, the bigger your required down payment will be. 
• As a general rule, the further away the property is from urban locations, the bigger your down payment.
• Zoning is expected to be residential, country residential, or agricultural upon exception for rural properties. 
• An appraisal is often required, and no value is given to existing structures - indeed the presence of structures could be a non-starter for some lenders.
• Existing services (water, natural gas, power, septic, phone) make properties more desirable to finance for lenders.

Please review the down payment requirements above to make sure you have sufficient down payment or existing home equity. ALSO to note - mortgage lenders are generally able to arrange land loans for $75K or more. For loans smaller than that, your local bank branch might be your best bet for a "personal" loan.

Types of Land Loans and Interest Rates

Basically you can buy raw land or vacant lots with "residential lending" up to 160 acres' with a "collateral loan" at Bank Prime Rate plus something, say Prime + 2%.  

If your land purchase is bundled with a construction mortgage, you can likely get a less expensive amortizing mortgage at normal discounted mortgage rates.

If your home will ultimately be an acreage home, then acreage lending rules will eventually prevail.

If you intend to but a mobile/manufactured home, then manufactured home lending rules will also apply.

If you are intending to have a lake or cottage property, check here for those lending rules.

Same for your future construction plans, as construction mortgage rules will apply.

When all else fails, and your property is just not getting bank lender's attention, there is always the world of private lending.

As mentioned, beyond 160 acres, your requirements are likely commercial development or agricultural in nature, and require loans specific to those purposes and related risks.

In all cases, a borrower needs to understand what it generally takes to get a mortgage. If you are unsure if you can, that should be your first step. 

Strategies for Getting that Piece of Heaven Here on Earth

Often the stars don't line up, especially for those diamond-in-the-rough properties. Remember, to start the land purchase conversation with anyone you gotta have enough down payment cash to work with to be taken seriously. That's called "skin in the game."

• If you own a home already, there may be equity that we can access via a Home Equity Loan.

When you own your own home, generally you can borrow up to 80% of the appraised value. If your home is worth $400K and you owe $200K as an example, there may be $120K cash that we can extract to help with your down payment (80% of $400 is $320 less the $200 you owe leaves $120K of potential incremental borrowing.)

• Consider personal lending not connected to the property for small loans.

Personal or unsecured lending is borrowing that is based on your credit score and employment, nothing else. Typically you can borrow amounts up to about $35K, but could be more depending on your job.  Use the funds to help pay cash for a small land purchase for example.

• Consider vendor financing options besides or in conjunction with bank financing.

Let me give you an example. Let's say the bare land property is $200K and the bank wants $100K down payment and you only have $50K. As the property owner has been trying to sell for over a year, she may be willing to accept your $50K up front and provide you a loan for the remaining $150K to be repaid over an agreed time frame. Meanwhile, you get settled on the land and your construction plans figured out. Part of my plan for you would be to then roll all the financing into a construction loan and repay/discharge the vendor mortgage for a nice soft landing!

• Consider bringing in a manufactured home for a short-term and financing as a regular home.

When you have a residential home on the land with services, the home and land can usually be financed as a normal home with a very low down payment. Keep in mind with manufactured homes, that lenders generally are looking for permanent foundations (screw pilings at the least) and models no older than 10 years. Over time, you get settled on the land and your dream home construction plans figured out. Then I help you finance that out, and at the end of the day, the mobile home is moved off the land and sold, or alternatively becomes a guest home or house for the kids. Nice soft landing!

• Lease the land with an Option to Purchase.

In this solution, the first step might be to simply "control the land" via a fixed term lease with the right to buy the land for a predetermined price for a set length of time (Option to Purchase).  The seller may be happy to get a revenue stream from you. Meanwhile you save down payment as fast as you can to meet the bank's down payment requirements, then exercise your right to purchase.

Please feel to explore these and other creative options with me with a free 30 minute consultation.  As a mortgage broker, I can help broker a deal between you and a seller as this is simply private financing. We charge a success-based consultancy fee for this service.

If you want to to chat, please provide as many details as possible including the land value, location, and the down payment cash you have in the bank. Thanks

Need some feedback?  Please share some information and we'll try and get you pointed in the right direction!