Last Updated on May 4, 2021 by Maggie Sutton
Are you thinking about buying land? You may find it surprising to learn that there are some significant differences between land loans and mortgage loans. If you were preparing yourself for the process and to be like your home loan, take a moment and read this article. You might be surprised at the differences.
Before you apply for a land loan, you should inform yourself about their different requirements.
What’s the Difference?
Obtaining a loan for a piece of land is much different than getting one for a house. Land loans pose more of a risk for lenders because the collateral is the property. When you buy a home already built, the lender can take the house back if you default on your loans, giving them something of value to sell. If you are buying just land with no structure, it can be much easier for a land owner to just walk away and leave the lender with the land. That risk is the reason why down payments and interest rates are higher for these types of loans versus mortgage loans.
However, one similarity of mortgage loans and land loans is that there are different types available to choose from.
Types of Loans
The kind of property you have determines what kind of loan you get. Other contributing factors are your plans for the home and the timing of the construction. You need to make sure that the land is legally available for your planned use. Ensure this by having a professional survey the property. It will consist of identifying the property lines, dimensions, easements (if any) and access. Easements and access will contribute to the property’s value and influence your ability to obtain a loan.
You can check with officials in your local area about zoning. You will need to get a zoning change that meets your needs if you wish to build in an area that is not intended for development.
Once you’re sure you can use the land for your plans, you can begin searching for financing. Don’t forget to review your credit report before applying to lenders.
The most challenging type of loans to get financing for are raw land loans.
Raw Land Loans
Land that is unapproved and has no plans for improvement is raw land. It has no added features such as utilities, streets, sewers, or other structures. Despite not having immediate plans for the property, you will still have to pay annual property taxes.
Raw land loans have higher down payment requirements and interest rates than improved property loans. Some lenders will require you to put as much as 50 percent down, but there are some that only require 20 percent. A lender who is local and familiar with the property may be more lenient than someone who is unfamiliar with the area.
Majority of lenders will treat raw land loans as commercial loans. If you run into this with your prospective property, the lending terms such as repayment period and how they calculate the interest will be different than those in regards to residential real estate loans.
Twenty to fifty percent down is a lot of money to obtain. Don’t worry; some options can help.
A strategy to helping you might be to use the equity in your home. You can choose a cash-out refinancing or a home equity loan or line of credit, or HELOC, to minimize your total interest expenses, including the closing costs. These loans give you the flexibility that allows more time and appealing interest rates when deciding how to improve the land.
If none of those options are available to you, but you’re still interested in buying a home, the government can help.
The U.S. Department of Agriculture offers programs for low income borrowers located in a rural part of the country. It’s called Section 502 direct loans. They have relatively lenient lending terms and let people buy property with plans to make improvements so they can add a house to the land.
If the property is already zoned for your intended use, the process of getting a loan will be much easier. Purchased land with direct plans for construction is the most accessible type of land loan to obtain because the mortgage on the structure pays the lender. Aside from home equity loans, some other options you can ponder are:
- Seller financing: The seller can offer short-term funding if you are ready to build. That often happens when a builder buys a lot. The terms for this type of financing differs. So, it’s always beneficial to ask about this type of transaction. If you decide to travel this avenue, try to have an attorney representing you.
- Credit unions: If other options don’t work for you, a credit union can be a helpful place to search for a land loan. They usually offer competitive rates; however, they’ll limit the size of the land they finance. This means you may need to research the different credit unions in your area.
Always have a plan for the land you intend to buy. It will make the process of obtaining a loan much more accessible. There are many differences between land loans and mortgage loans. Develop a plan for your prospective property and anticipate higher loan terms such as a down payment. There are many avenues available for assistance in obtaining that high of a down payment. Research and take advantage of the ones for which you qualify.
If you’re a local hero in your community, Homes for Heroes would like to help you obtain a loan for your future land. Our heroes have huge hearts and a willingness to serve their communities through hard work and dedication in their careers as firefighters, teachers, law enforcement, medical professionals, and military members. We appreciate your efforts to make our country a better place.