A land mortgage is a type of mortgage loan that is used to purchase land or a lot, in contrast with a structure that has been built on a piece of land. Buyers of raw land usually purchase it with the intent of developing it or establishing a structure. These mortgages are different from ones for structures because, from the point of view of a bank, land is a less secure investment. If someone defaults on the loan, the bank will be left with an empty lot that could be difficult to resell.
Typically, banks have different requirements for land mortgages. Getting one may require a higher percentage of the sale price as a down payment, ensuring that the borrower has substantial equity in the land. The borrower may also be obliged to purchase mortgage insurance or to offer up another form of collateral to support the loan, such as a property in another location.
Another concern is the ability to build on or otherwise utilize the land. Banks assume that something will be done with the empty lot, because otherwise, the property would not generate any returns for the owners. Some banks will not loan money until the parcel has been inspected, and the buyer may need to provide proof that the land is safe for building, that the zoning permits building, and that permits for water, sewer, septic, and other services can be obtained. Failure to obtain this proof can put a mortgage in jeopardy. Liability may also become an issue, as people who are injured on vacant land can recover damages from the owner, leading some banks to require that undeveloped land be fenced or otherwise controlled for safety.
There are some distinct advantages to a land mortgage. Land is often much less expensive than occupied lots, reflecting the fact that significant investment is needed to make the property usable. Buying land also allows people to build a structure to their exact specifications, rather than being forced to work with an existing one. It may also be possible to purchase a large lot at low cost, for people who want open space around their homes.
If people purchase land as an investment, intending to sell it later, they often pay cash rather than trying to obtain a mortgage. Land purchased for farming may also need to be paid for in cash, reflecting the fact that agriculture may not generate a significant return, especially in areas where property prices are high and land is at a premium. Organizations that purchase land for the purpose of retaining open space, greenways, and parks may also be forced to pay for their purchases in cash by banks that are wary of extending a mortgage on a property that will lie fallow.
