About Land Loans

When you are deciding on home buying and are looking to purchase a home, you can also consider building your own home.

The thought of building a home can seem perfect until you as homeowners realize how much would it cost to build a home.

Even if building a house can be expensive, there are various ways to make it more affordable for first-time homeowners. one of the ways is through land loans.

If you’re interested in building a house, you might choose to apply for land loans.

There are a few lenders who offer land loans and they can assist you. Meanwhile, let us understand more about land loans.

What is a Land Loan?

A loan that is used to finance the purchase of a plot of land is termed a land loan.

When a buyer is interested in buying a piece of land to build a home or utilize the land for business purposes this land loan can be useful.

If you want to obtain a land loan, then the type of loan you take will depend on the location of your land and how do you intend to use the land.

Raw land loans, unimproved land loans, and improved land loans are the three most common types of land loans.

Types of Land Loans

Raw land loan:

Raw land means completely undeveloped land with no electricity, sewers, or road facility.

You’ll need to apply for a raw land loan if you’re interested in this type of land then apply for a raw land loan.

As it would be difficult to get financing for undeveloped land, it’s necessary that you create a solid, detailed plan for how you intend to develop the land.

This project of yours will show the lenders that you’re committed to it and don’t pose a risk.

If you have a large down payment and good credit then you increase your chances of qualifying for the loan.

Even if the purchase of raw land is cheaper than developed land, it will have higher interest rates and big down payments in comparison to other land loans.

Unimproved land loan:

Unimproved land is quite similar to raw land, but it is comparatively more developed.

Many a time unimproved land has some basic utilities and amenities, but may not have an electric meter, phone box, and natural gas meter.

Even if an unimproved land loan is less risky than a raw land loan, it still can be difficult to obtain, This too needs you to make a detailed plan, a sumptuous down payment, and have a strong credit score.

As unimproved land loans aren’t the riskiest type of loan, the down payments and interest rates won’t be as high as for a raw land loan, but it’s possible that they are higher than other types of loan financing.

Improved land loan:

Improved land has access to things like roads, electricity, and water unlike raw land and unimproved land. Improved land is the most developed type of land, so it is more expensive to purchase.

However, compared to a raw land loan or unimproved land loan, the interest rates and down payments of an improved land loan are lower.

Though it’s equally important to put down a significant down payment and have a good credit score.

Obtaining a land loan is similar to obtaining a mortgage loan by a buyer, but it is not easy to determine what the land is worth because there is no property collateral.

This means that lenders consider land loans as riskier transactions, and demand higher down payments and interest rates than what they would charge for a typical home loan.

How does a Land Loan Work?

As there are different types of land loans, each has its own qualifying requirement to meet for the borrowers.

However, when a borrower applies for a land loan there are a few general guidelines that are taken into consideration. Like it is with any other loan here too a borrower needs to have an excellent credit score.

A borrower would also need to explain their intended use of the land, which could vary depending on the type of loan they’re interested in.

A borrower needs to highlight aspects of the property like zoning, land-use restrictions, surveyed boundaries, and access to utilities which will give lenders an idea of how risky the loan might be.

Once the lender takes these factors into account, they can issue the rates and obligations of the land loan.

The interest rates of land loans tend to be higher than mortgage interest rates as they’re considered riskier.

However, if they have a better credit score and debt-to-income ratio then a borrower can qualify for lower rates.

After the rates of loans are determined and the borrower has been approved by a lender and agreed to the loan’s terms, the borrower is responsible for making a down payment and repaying the loan with the decided interest rate.

Pros and Cons of Land Loans

If applying for a land loan is on your bucket list, you’ve realized by now that it will have its own pros and cons.

To help make this decision easier, let’s look at some pros and cons and identify how they’d apply to your personal needs and financial situation.

Pros:

Applying for a land loan is beneficial for you if building a home or business is important to you.

The biggest benefit is having an opportunity to build the home of your dreams. If you’re looking at the land for commercial purposes, then it can give businesses the opportunity to take advantage of the promising areas.

If you are a visionary and are creative and patient, using the land loan to build a home or business would be the perfect option for you.

Cons:

Applying for a land loan. comes with its set of realities and drawbacks. As a land loan is a riskier transaction, there is a lack of collateral which makes some lenders resistant to provide loans to borrowers.

There is also the possibility for a higher down payment and higher interest rates when it comes to financing.

There is also the possibility of experiencing unforeseen complications and other issues because it’s a new construction project.

How to get a Land Loan?

Acquiring a land loan is easiest to seek from a community bank or credit union which is located near the land you’re looking to buy. But depending on the usage of the land, there can be other loan options available to borrowers.

For instance, you can apply for a USDA loan if you’re planning to build a primary residence in a rural area.

The USDA loans and USDA construction loans are designed for low to moderate-income families and they have a repayment term of 2 years.

They also have low interest rates, and sometimes depending on the situation, the borrowers may qualify for a loan that needs no down payment.

On the other hand, you can apply for SBA 504 loans if you are going to use a land loan for commercial purposes.

The U.S. Small Business Administration (SBA) provides SBA loans, this organization is designed for business owners looking for funds to help contribute to the cost of the land purchase.

Though the interest rates and terms of SBA loans can vary, the repayment period lasts typically for 10–20 years.

Other options for Purchasing Land

If you’re interested in purchasing land but are skeptical of taking out a land loan, you may consider other options that might be a more suitable choice for your needs.

Home Equity Loan:

Different from land loans and sometimes a more desirable option for few borrowers are the home equity loans.

They don’t require a down payment and can be locked in with a lower interest rate regardless of what the borrower plans to do with the land because now your home secures the loan.

The interest you pay is not tax-deductible as you’re not using the loan to buy, build or improve the home used as collateral.

Depending on the lender the loan repayment term can vary and could last anywhere from 5 to 30 years. But if you default on the loan, you could lose your home, which serves as collateral.

Seller Financing:

Seller financing can also be an alternate for some borrowers. This is a real estate agreement where instead of a financial institution or lender it is the seller who is handling the mortgage process.

The buyer signs a mortgage from the seller instead of applying for a traditional mortgage.

As sellers tend to be more flexible than financial institutions this option can be beneficial for buyers.

Conclusion

If you’d like to build a home, look at the pros and cons of a land loan to identify if it’s right for you.

While the thought of building your dream home sounds perfect, you also need to be aware of the realities that come when taking a land loan.

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