Using Land In Lieu of a Mortgage Down Payment

Saving up for a new home can take many people years and to most it can seem like there is no easy answer to achieving their dream. According the U.S. Census Bureau as of December 2020, just 65.8% of Americans currently own their home. A hurdle that stands in the way of homeownership for the remaining: saving up for the down payment. The great news is, there are other easy options to help you open the door to your new home faster. Many lenders will allow land — either owned or received as a gift — to be used as collateral instead of a cash down payment when obtaining financing to purchase a new home.

Basics of Land in Lieu

Land equity is valuable, but does not work the same as cash. It can potentially be used to help secure home purchase financing, but will not lower your actual loan amount like a cash down payment. The amount of land equity needed will depend on the borrower’s credit worthiness, which is determined by a lender's criteria. Depending on the purchase price of the home and the value of the land being used as an alternative to a down payment, little to no additional cash could be required to obtain financing. The lender will hold a lien on the land used as collateral, as well as the home. The liens will be released when the loan is paid in full.

Prefabricated and Manufactured Home Loans

Some lenders will accept land as collateral provided the land has equity value that meets a certain percent of the sales price and the land is free and clear of all existing liens. The amount of equity required is based on the borrower’s creditworthiness, the loan program applied for and other factors. For example, if the sales price of a new home is $100,000 and the lender requires 10% equity for the home loan, the land will need an equity value of at least $10,000. The value of the land is usually assessed by a third party, like an appraiser or the local tax assessor. If the land equity does not meet the required percentage; the borrower can talk to the lender to learn about their alternate options. Typically, manufactured or prefabricated homes cost less than a new site-built home with land, so they can be a smart option if saving for a down payment.

Making Homeownership a Possibility for Everyone

Trying to secure financing can seem like a big step, especially for first-time home buyers. But, there are options tailored to fit just about every need. “Our goal is to provide home financing options to customers that best fit their needs,” said Eric Hamilton, President of Vanderbilt Mortgage and Finance, Inc. “If obtaining a cash down payment is a challenge, then we have educational resources and specific programs to help those who want to reach the goal of homeownership.” If you do not have any land to use in place of a down payment, that is ok, too! Check out these helpful tips on how to save for a down payment.

Check Out Our Guide to Down Payments