If you are trying to buy land on the Big Island, but you don't have cash to cover the entire purchase – then this one is for you!
First off, you should consider what your plans are for the land. Do you plan to build a house? If so, will you do this right away? The use of the land is a major considerations as to what type of financing might work best for you. Financing raw land is not the easiest thing to do. Unlike with a traditional mortgage, there is no house for a lender to use a collateral. This means you will probably have less options, with higher down payments, higher interest rates and shorter terms. Most people who can easily get financing for land are already Hawaii residents and are able to qualify for a the loan with their local credit union or community bank. Whatever your individual situation is, there may or may not be a good financing option for you.
Land loans look a lot different than a traditional mortgage. The terms are generally up to 3 years of interest only payments at a fixed rate. Down payments are usually pretty high, I would say plan on at least 30%. At the end of the 3 years you would either need to pay the balance or do something like refinance with a construction loan. Again most of the successful land loans situations I see are from Hawaii Credit Unions offering financing to qualified Hawaii residents.
If you are buying raw land for your future house and you plan to build on right away, or if you're buying a partially constructed house that you couldn't get a traditional mortgage for – a construction loan might be an option for you. A lot of the programs I've seen offered have fixed rate interest only payments while you are doing construction and then they convert to a mortgage. There are some additional challenges with construction loans. In addition to getting approval for the financing, you also need to get your licensed contractor in place, your building plans and specifications for an appraisal, your county permits and project plans . Closing escrow can take a lot longer than the average, sometimes up to 6 months. Depending on how the real estate market is when you buying, seller's may not be as willing to work with a construction loan over cash or other financing. It can tie up a property for a lot of months with and there is always a risk of the buyer's loan falling through. Since there is so much involved with construction loans in Hawaii, most potential borrowers usually to opt for a different financing method.
If you are buying land in Hawaii that will have some kind of agricultural operation – like a farm, ranch or orchard – you may want to look into financing with American AgCredit. They are essentially like a co-op that offers agricultural loans. They even have terms of up to 30 years, which is a lot closer to the terms of a traditional mortgage. They also offer unique payment options, fixed and variable rates, really flexible terms and competitive rates. So as far as financing land goes, they currently offer the most options I've ever seen. But again, it's only available for land that will have actual agricultural operations.
Seller financing is another financing method used on the Big Island. This is where the seller is essentially the lender for the terms agreed to by both parties. The downfalls of seller financing are that most sellers don't offer it. The down payment is generally significant, usually over 50% of the purchase price. The terms are fairly short, the interest is fairly high, and you will usually have a large payment at the end. It's not a great option if you're hoping to build on the land right away, because you cannot start construction until you have paid off the entire balance.
Because financing land can be so challenging for some people, I've seen and heard of buyers using more creative and untraditional means to finance their land purchase. For example, I've seen buyers take out a Home Equity Line of Credit (HELOC) on a house they already own. I've seen buyers get money from a friend or family member. I've seen buyers take money from their retirement accounts. Now whether or not any of these things are options for you, or even a good idea, might be different for everybody.
Buying land in Hawaii is a wonderful opportunity for many people, but you will want to be sure to weigh the pro and cons of financing it to make sure it's right for you. Some people find a financing option that is a good fit for them. Others find that their options are limited and cost prohibitive and decide to just wait and save the cash. Many find that it's just a lot easier for them to qualify for a traditional mortgage and buy land with a house already on it.
*I am not a licensed loan officer and I am not a financial advisor. When making major financial decisions, make sure you do your own research and consult with the properly licensed professional.