November 29, 2018
Anyone who is considering purchasing a plot of land will need a way to pay for it. While a few select people may be able to pay cash for their new land, most people will need to obtain a land loan for their purchase. Land loans are basically financing, similar to a home mortgage, and you can obtain them from either a bank or a lender.
When you begin talking to a lender or bank about a land loan, you will need to know the size of the lot, the type of lot, and the price that is being requested by the seller. The bank or lender will then check your credit history and what the land is valued at to see if you are eligible for the land loan. Depending on the amount of money you are requesting for financing and the size of the lot, the bank will determine the loan to value ratio and whether they are willing to take the risk.
Banks and lenders are always hesitant to take on a risk of land loans simply because it is difficult to determine what the land is worth due to no property collateral. That increased risk means that you will need a larger down payment and you will be paying heftier interest rates.
Types of Land Loans
There are a few different types of land loans, so you will want to be prepared for the exact one that you are going to need. Here are the three options that most people need to consider:
Lot Land Loan
Lot lands are the ones that many banks and lenders are willing to take risks on, because there are certain items already in place on the property. Most of the time, a lot land is space that will be used for residential construction in a developed area and electricity and water are readily available. The upfront costs for this type of land loan are typically lower, but you should plan on needing between twenty and thirty percent for a down payment with the rest due over as much as a thirty-year term.
Raw Land Loan
If you are looking at a piece of land that has absolutely no electricity, sewer, roads, or other improvements, then you will need to obtain a raw land loan. These types of land loans can be very difficult to obtain, because they are risky for the lender. To improve your chances of getting the financing that you need, you should have a solid development plan, as well as a large down payment and an extraordinary credit history. It is common for lenders and banks to request as much as fifty percent down for this type of land loan and the interest rates will be the highest that you have ever seen.
Construction Loans
A construction loan is an excellent option if you plan on building on your new property and you do not want to deal with two different types of loans. A construction loan will cover the purchase of your land, as well as the cost of the work for the construction.
There are a few things that you will need in order to qualify for this type of loan, including a regular income, a credit score that is at least 700, a very low debt to income ratio, and an appraised value for your plans. Before you apply for this loan, you will want to have at least ten to twenty percent readily available for a down payment, with the higher amount being more favorable. As you get closer to the approval stage, you will need to submit your construction plans, so that the lender can see that a qualified builder is doing the work. This will also show them the timeline and all the projected costs.
The more thorough your plans are, the faster this entire process will be. It is often better to work with builders that your lender is familiar with, as there are less things that need to be researched. Since the money is distributed throughout the construction process, the lender will be very involved, and the entire draw schedule is always determined before any of the work begins. It is common for the lender to request an inspection before the first payment to the builder, especially if they have never worked with the builder before.
These types of loans are usually short-term arrangements that last for less than a year before you convert them over to a regular fifteen- or thirty-year mortgage. During the short-term loan, you will only make payments that cover the interest that is due.
The Land Loan Process
As you can see, there are different rules and regulations that you need to follow when you apply for a land loan. Your main goal will be to ensure that you have excellent credit, a low debt to income ratio, and a regular income. Any land loan that you qualify for will need to be paid in full within two to five years, although you may qualify for a longer term if you have special circumstances.
Interest Rates for Land Loans
The below rates are the averages of what may be currently available for land loans. Since these loans are riskier than regular home mortgages, the rates are always higher. You will qualify for the lower rates if you have excellent credit and a higher down payment. You may also need to have enough money readily available to cover between six and twelve months of payments.
- Lot Land Loan: 5% - 6%
- Raw and Recreational Land Loan: 5.25% - 6.25%
- Construction to Perm (Loan Converts without Additional Closing Costs) – 4.75% - 5.5%
- Construction Loan Rate: 4.5% - 5.5% variable