Land loans, also known as land purchase loans or raw land loans. They are specifically made for the purchase of undeveloped land. A land loan is different than a traditional mortgage.
Individuals or property developers acquire land to build custom homes, commercial buildings, or even start a farm. The approval depends on factors such as the credit score, the intended use of the land, location, and down payment.
Land loans may have different terms and requirements depending on the lender and the specific circumstances. Consult with a financial expert before investing!
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🚀 Key Takeaways
- Raw Land Loans: A raw land loan is money that a bank or lender gives you to purchase a piece of land that hasn’t been developed yet. This land doesn’t have any buildings or houses on it.
- Land Loan Downpayment: Typically, down payments for bare land loans can range from 20% to 50% of the land’s purchase price.
- Credit Score: You will need an excellent credit score to qualify for a land loan. Most lenders require a credit score of 720 or above.
- Land Investment Risks: Investing in land carries risks such as market fluctuations and development challenges. Understand local market conditions and assess potential returns.
What is a Land Loan?
A land loan is a type of loan specifically used to finance the purchase of vacant land without existing structures.
It is different from a home loan. A Home loan is used to purchase a property that includes a house or other buildings.
Lenders may consider a loan to buy land as risker than a home loan. You will also have a pay a higher rate of interest. However, purchasing land can be a very good financial deal, if you make informed choices.
Types of Land Loans
There are a few options for borrowers looking to finance a land purchase. Here are the most common types of land loans given by lenders.
- Raw Land Loan: A raw land loan is for buying empty land without any buildings or utilities. People get this loan when they plan to develop or use the land later. Raw land loans usually have higher interest rates and require larger down payments.
- Unimproved Land Loan: An unimproved land loan is similar to a raw land loan. It’s for buying land that doesn’t have buildings, but it may have some basic things like roads or utilities. This loan is for land that needs more development.
- Improved Land Loan: An improved land loan is for buying land with infrastructure like roads, utilities, and other improvements. People use this loan when they want to build on the land right away. Improved land loans usually have better terms than raw or unimproved land loans.
- SBA 504 Loans: SBA 504 loans are a special type of land loan offered by the U.S. Small Business Administration. These loans help small businesses buy land or commercial real estate. They have fixed interest rates, longer repayment periods, and lower down payment requirements.
» What is a Land Contract: Learn more about how a land loans and contract are related
How do Land Loans Work?
Land and lot loans work just like a mortgage. However, lenders do perceive loans for buying land as risker. The borrower must qualify under the special requirements of a land loan. We have listed them below –
How to Get a Loan for Land Purchase
- Good Credit: You should have a credit score of 720 or higher. Moreover, a higher credit score will get you a lower interest rate.
- Down payment: Land loan borrowers must pay a more significant downpayment. 20% – 50% of the purchase price should be your downpayment.
- Type of Land: Factors such as location, accessibility, zoning restrictions, utility availability, etc affect your ability to secure finance.
- Land Appraisal: You need to conduct a professional appraisal and survey of the land, to determine its value and boundaries. This helps the lender determine the suitability of the property as collateral.
Qualifying criteria will differ among lenders. Working with a mortgage broker or loan officer can help you navigate the process and find the best loan option for your needs.
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Land Fundamentals
Land fundamentals refer to key aspects and characteristics of a piece of land. These have a significant impact on the value, use, and legal considerations. Three important land fundamentals are boundaries, zoning, and access.
Boundaries
Land boundaries define the physical limits and extent of your property. Boundaries will help define property ownership and reduce conflicts with neighboring landowners.
Moreover, lenders require you to clearly define the land boundaries to qualify for a loan.
Zoning
Zoning regulations are established by local government authorities. They divide the land into different designated zones based on specific land-use purposes.
Different zones include residential, commercial, industrial, agricultural, recreational, or mixed-use areas. Zones determine what you can do with that piece of land parcel.
Access
Access refers to the way a property is entered and exited. It impact’s the property’s value and functionality. Properties with direct access to well-maintained roads or highways tend to be more desirable.
Lenders will consider access to your property during the loan application.
Pros and Cons of Land and Lot Loans
Here are some potential pros and cons of land and lot loans:
Pros:
- Flexibility: Land loans can be used to purchase various types of land. You can build a new home, use it for agriculture, or even develop a commercial space.
- Investment potential: Land will appreciate over time. You can invest in raw land for future development. Think of long-term benefits when investing in land.
- Build on your terms: If you are purchasing land to build a home, a land property loan allows you to choose your builder and design the home to your dreams.
- Save on Taxes: In some places, owning land can save you money on taxes. You can deduct property taxes, mortgage interest, or expenses related to improving the land.
- Inheritance: Land can be a way to leave a lasting legacy for your family. You can pass it down to your children or include it in your estate planning.
Cons:
- Higher interest rates: Land loans may have higher interest rates than traditional mortgage loans. Lenders consider loans with land as collateral to be risker.
- Shorter repayment terms: Land loans may have shorter repayment terms. This can result in higher monthly payments.
- Difficulty in obtaining financing: Lenders may view land loans as high-risk investments, which can make it challenging to obtain financing.
- No income generated: Unless the land is used for agricultural or commercial purposes, it generally does not generate any income.
Other Land Purchasing Options
If you are wary of taking on a land loan, consider these alternative solutions to fulfill your property ownership goals.
Home Equity Loan
Home equity is the difference between your home’s value and mortgage balance. A home equity loan uses a homeowner’s equity in their property as collateral to borrow money.
You do not require a downpayment on such type of loan. Moreover, you may be able to secure a lower rate of interest from the lender.
However, your primary home becomes the collateral in this case and you can face foreclosure if you default on the repayment.
Seller Financing
Seller financing for land is a method where the seller of the land acts as the lender. As the buyer, you’ll negotiate the purchase price, down payment, interest rate, and any other terms of the financing agreement.
Before making any agreements, it’s important to make sure the seller has the right to sell the land and that there are no problems with the ownership. This is something a lawyer can help with.
Conclusion
Land loans provide an opportunity for property ownership, offering benefits like personal freedom, investment potential, and space for your dreams.
However, risks include financial obligations, market fluctuations, and potential complications.
Consider your goals, do thorough research, and consult professionals before making a decision.
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Frequently Asked Questions
1. How to finance land purchase?
There are various ways to finance a land purchase. Such as cash payment, traditional lenders offering land loans, seller financing where the seller acts as the lender, utilizing home equity loans or lines of credit, or considering personal loans from banks or online lenders.
2. Can you get a mortgage for land?
Yes, it is possible to obtain a mortgage for land. Some lenders offer land mortgages or vacant land loans specifically tailored for financing land purchases.
3. What are current land loan interest rates?
Current land loan rates range between 4% - 6% and can even go higher. Land loans attract a higher rate of interest than a traditional mortgage.
4. Is there 100% financing for land loans?
No. It is very rare and difficult to get 100% financing for raw land deals. Lenders offer loans based on property value. For plot loans, the maximum loan to value ratio is 70%.
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