In London, houses are commonly leased for long periods of time, often for 99 years or more. Mortgages on these leaseholds are often treated as if they were purchases. However, mortgages involving leased property are less common in the U.S., and borrowers may find obtaining financing for property on leased land difficult at best.
The Theory of Mortgages on Leased Land
You sign a 50-year lease on land you intend to use for agricultural purposes. Your business goes well, and you decide you'd like to build your residence on the property. You may wonder how the bank will respond to your loan request. In theory, there should be no problem in obtaining a 15-year or even a 30-year mortgage to build a house on land you control for the next 50 years. The loan will be paid off -- and the bank will have no further financial interest in the house -- long before the land lease expires.
The Reality of Mortgages on Leased Land
In practice, many U.S. lenders will not give you a mortgage, whether you're trying to finance a house you intend to build on land leased from someone else or simply trying to take out a mortgage on leased property that includes both land and residence. This may partly be a matter of custom, but one real problem for lenders is that you may decide to move on before the mortgage expires. The bank may anticipate the difficulty you'll have in finding a buyer for a house on property owned by another, or the bank may anticipate being stuck with repossessed property on land the bank doesn't own.
Reasons Not to Finance Property
There are reasons why you may not want to take out a property mortgage on leased land. At some point, the lease will expire, leaving your surviving family with a house they can no longer live in unless they arrange a lease extension on the land, possibly with a considerable increase. If you decide to move, you may have difficulty finding a buyer. The buyer may want a substantial discount because the lease period is less than the original 50 or 99 years. Finally, few lenders will extend you the mortgage terms that they would extend for a conventional mortgage. Chances are that your interest rate will be higher and that the bank will want a bigger down payment.
Executing a Land Lease
Purchasing a house on leased land under certain circumstances offers some advantages. If you are buying a house that someone else has already built on leased land, you will pay substantially less than you would for a house on its own land. You will also save money on property taxes and assessments. Often, purchases of housing on leased land are offered as part of a community development, which is often the case with Indian-owned land that is leased from the tribe. Alternatively, the homeowners' association owns the land, and individual homeowners own a share of association assets. In most cases, these purchases have no real expiration date. As long as you own the house, you have an undivided ownership share in the community development's land.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.