Last Updated on October 13, 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.
Why Are Land Loans Different?
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 house that is already built on land, the lender can take the house and land 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 easier for a land owner to just walk away and leave the lender with the land, which could be significantly harder to sell. 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 Land
The kind of property you buy determines the type of loan you can get. Other contributing factors are your plans for the land and the timing of construction, if any. You need to make sure that the land is legally zoned for your planned use. You can ensure this by having a professional survey the property. A survey 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. Cities have zones for things like residential housing, commercial use, green space, and more.
Most city governments have a zoning office you can contact. You might conduct a survey and find that the land you wish to purchase is zoned for something different than your intended use. The land might look like a great place to build a house, but if it is zoned for commercial use, you legally can’t build a house there. You might be able to petition the city or county to have the land zone changed. Or, you might have to find another piece of land all together.
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 considered raw land. It has no added features such as utilities, streets, sewers, or other structures. Improved property means that it already has some degree of utility lines, sewers, roads, or other such structures.
Raw land loans have higher down payment requirements and interest rates than improved property loans. This is again because of the element of collateral if you were to default on the loan. Unapproved land will not be appealing to a mass market of buyers. Some lenders will require you to put as little as 20%, but as much as 50%, down payment for unapproved land. A lender who is local and familiar with the property may be more lenient than someone who is unfamiliar with the area.
USDA Government Land Loans
The U.S. Department of Agriculture offers programs for different types of land use across the country, whether you’re looking to start a farm, build or renovate a home, or several different other uses for the land. 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. There are some income requirements to USDA loans that you should be aware of however.
Other Financing Options
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 go this route, try to have an attorney or licensed real estate or loan specialist 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, you usually must be a member of the credit union, and they might have limits on the amount of land they’ll give you a loan for. This means you may need to research the different credit unions in your area.
Have a Plan
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 you qualify for.
If you’re a local hero in your community, Homes for Heroes would like to help you obtain a loan for your future land. If you’re looking for a land loan and you have a career as a firefighter, teacher, law enforcement, healthcare, or are current or former military members, our loan specialist can help you find the right loan for you. We even reward our heroes with Hero Rewards in the form of a check back to you after closing. Get started today!
