One of the most frequently asked questions in the real estate industry is “Can I buy land with no money down? The answer to that question is basically no…and yes…depending on your financial situation and your definition of “money down”. To get clarification and find out what the options for how to buy land with no money down are, we reached out to First South Farm Credit (FSFC) which has over 40 offices serving Louisiana, Alabama, and Mississippi. FSFC specializes in providing credit for farming operations that include crops, livestock, land, and timber.
We spoke to Taylor Hart, manager of the First South Farm Credit Auburn/Opelika Branch. Hart pointed out that for land loans FSFC requires a 15% down payment and can finance the remaining balance, depending on the borrower’s creditworthiness, income, and other considerations, for up to a 30-year term with competitive rates. “Depending on the credit situation and financial picture of an individual we can tailor a loan program that makes owning a piece of paradise, ranging from a small piece of “dirt” to a large tract, a reality,” Hart said. “Once they get that property, we can also financially assist in making improvements and developing the parcel.” First South works within the 15% down payment structure but Hart has some suggestions and “wrinkles” when it comes to how to get that down payment and it doesn’t always need to be cash.
Use Gift Money for a Down Payment
The first thing for applications who are a little shy on cash could be to see if you can get funds from family or even friends. “If a family member or a friend is willing to ‘gift’ the funds for a down payment, we don’t have an issue financing the remainder,” Hart said. “If the funds are borrowed from an outside source we will need to figure that into our repayment analysis but a gift that has no repayment terms will have no bearing on the deal as long as other financial ratios are positive.”
Use A Mortgage Cosigner
Another possible source for a down payment is to have a co-signer on the note that can provide the down payment. In this scenario, both individuals have the responsibility to complete the terms of the loan. There may be an agreement between the two borrowers about who is responsible for the down payment and who is responsible for making the monthly payment, but at the end of the day, they are both responsible for meeting the terms of the note.
Can you Get a Loan for a Down Payment?
A third source of a down payment is to tap any equity you have in your home with a home equity line of credit or HELOC (also known as a second mortgage). The loan amount is based on the difference between the home’s current market value and the homeowner’s mortgage balance due. First South Farm Credit doesn’t do second mortgages. “A HELOC can provide you with the down payment for a piece of property and normally are available at reasonable rates,” Hart pointed out. “In this scenario, the HELOC would be figured into the repayment analysis but can be a source of getting cash for the down payment based on an equity position.”
Using an IRA for a Down Payment
Hart said that if your options just aren’t working out then it is time to look at what you have that can be turned into “liquid assets” (as in cash). If you own a tax-sheltered annuity (TSA) or an individual retirement account (IRA) or other financial instruments you may be able to cash these in to get the required 15% down payment. Even though there may be a penalty it would give you the funds needed to get into the land game. While that penalty for withdrawing interest-earning funds is a bit of a bitter pill to swallow, the characteristics and the features of the land may sweeten up the taste a little. For example, if you have marketable assets, such as timber that can be harvested, the income from this could cover the penalty cost.
Using Land as Collateral for a Loan or Consolidating Mortgages
“If you already own a piece of rural property free and clear we can take that property as collateral in lieu of a down payment for the purchase of the new tract,” Hart said. “Or if you have collateral in a tract of land but still have a mortgage on it, we can refinance that tract into the new loan for the purchase, and, depending on collateral position, a cash down payment may not be needed. We would be looking for at least an 85% loan to value in this situation.”
At the end of the day keep in mind and factor into the overall scenario that when you deal with a financial institution, like First South Farm Credit, that is a cooperative you are working in essence with your own company. While that sounds a bit far-fetched the reality is that when you take out a loan you become a member which means you own part of the business. That “ownership” entitles you to share in the profits through FSFCs Patronage Refund Payment Program. In other words, you get money back and that can help subsidize any money spent on buying that dream piece of land.
