Can You Get a Mortgage for Land?

Many private lenders offer land loans, but they usually require a down payment of up to 50% and have a high interest rate. Land loans are also called land mortgages, but they differ from traditional residential mortgages. You can also get a construction mortgage if you want to buy the land and then build a home on the land. Some lenders consider extending a commercial mortgage for land purchase, especially if the amount is significant.

Several loan options are available for land buyers, but most require a high down payment, a high interest rate, or limited funding. The following table compares the most common ways to finance a land purchase in Canada.

Comparison of Types of Loans You Can Get For Land

Land loans, also called land mortgages, work similarly to residential mortgages with collateral, but lenders consider them more risky. Land loans are only secured with the purchased land since there is no existing home or structure. If a land mortgage loan borrower defaults, the lender takes over the land, which might be challenging to sell. This is especially true for raw land, which might not even have road access or utilities.

This makes land mortgages and land loans riskier than residential mortgages. Lenders require a large down payment and a high interest rate to compensate for the risk. The down payment for a land loan can reach 50% for raw land, especially if you plan to hold the land long-term as an investment, but this requirement can be lower for serviced lots. Vacant land in urban areas can have a down payment requirement of around 20% to 30%. You should talk to a mortgage broker who works with alternative lenders to see the best mortgage offers available for your situation.

If you plan to build a property on the land you are buying, a construction loan may be a better option. For a construction loan, you should consider the price of land and the cost of building a house. You may have to estimate the concrete, wood, and other materials and labour costs required to build a house to get the construction loan.

Construction loans allow you to borrow money to buy land if you plan on building a custom home on that land. They let you borrow money in draws, which are released at certain milestones. This allows you to save on interest when only a part of the total mortgage amount is used.

Construction mortgages will cover part of the cost of building the home and the land. The first draw is usually used to purchase the land lot. Other draws are distributed throughout the home-building process and milestones. Construction mortgages require only interest payments during construction, and the principal starts to be repaid after the home is built.

If you’re looking to buy land for a farm, all major banks in Canada offer farm loans to help finance your purchase of farmland. You can also use the funds to purchase equipment and to construct farm buildings. This includes:

• CIBC Agriculture Loans and Lines of Credit
• BMO Farm Mortgage
• TD Long-Term Farm Loan
• RBC RoyFarm Agriculture Mortgage
• Scotiabank Farm Mortgage Loan
• National Bank Farm Mortgage

The Canadian Agricultural Loans Act (CALA) Program offered by the federal government helps farmers and potential farmers by providing up to $500,000 in loan guarantees to lenders for loans used to purchase land and to construct buildings on the land. CALA loans are available from Canada’s major banks and credit unions, with a down payment as low as 10% to purchase land.

If you cannot access the mentioned financial products, you can also apply for non-specialized loans. They are usually much smaller, so they are unlikely to cover the full price of land, but they can help in some cases.

If you’re a homeowner, you may be able to use a home equity line of credit (HELOC) or home equity loan to purchase land. You can use the funds from a HELOC or a home equity loan for anything, including land. HELOCs only require an interest-only payment for some time, so using a HELOC to buy land will require a smaller monthly payment. Increasing your payments to pay down your principal would still be a good idea.

If the land isn’t particularly expensive, you may consider getting a personal loan, but it is a very limited option.

Seller financing, also known as vendor financing, owner financing, and vendor take-back mortgages, occurs when the seller extends you the mortgage for their land. The seller acts as a lender, meaning you will make regular payments with interest to them.

Instead of paying the full amount to the seller and needing to get financing from a third-party lender, seller financing allows you to get it directly from the seller and avoid extensive paperwork and some closing costs. This can be helpful if you’re having difficulty getting approved for a land loan, for example, due to a bad credit score.

One type of seller financing is called a contract for deed, which is also known as an installment land contract. When you purchase land from a seller with an installment land contract, the seller will still keep the title to the land while you make loan payments to the seller. Once the land loan is paid off, the seller will transfer the land title to the buyer.

Another type of seller financing is a deed of trust, which is similar to a regular mortgage. The land buyer borrowing from the seller will get the equitable title of the land, while a trustee will hold the legal title. This third-party trustee will usually be a title company. Once you pay off the land loan the seller lent you, you’ll receive the legal title of the land. In the meantime, having an equitable title means that you benefit from any increases in the value of the land, which is similar to a traditional mortgage.

You can mix seller financing with other land loan options. This can be helpful if your lender isn’t willing to let you lend the entire land purchase price. For example, a land loan lender might let you borrow $100,000 for land the seller sells for $150,000. You may be able to negotiate seller financing for the remaining $50,000 from the seller.