What Are Land Loans?
A land loan, also commonly referred to as a lot loan, is a financing option used to purchase a plot of land that doesn’t have a house already built on it. And similar to a mortgage, these loans can often be obtained through a bank or online lenders, who will evaluate the land’s value and your credit history in order to determine if you’re an eligible borrower.
Moreover, the type of lot loan that you can take out, as well as the terms and requirements, will usually vary depending on when and how you intend to use the land in question. For instance, the closer the land is to being built, the easier it will be to secure financing, as well as more favorable down payment requirements and interest rates.
How Do Loans for Land Work?
The process of securing property loans is somewhat similar to getting a traditional mortgage because you will usually need to present good credit history, an acceptable debt-to-income ratio of about 30% to 40%, and have enough income to make the down payment.
They also come with significantly shorter terms of roughly two-to-five years, compared to the 15-to-30-year terms that are typically offered for most home loans. At the end of the loan term, most land loans will require borrowers to make a balloon payment to pay off the balance.
Plus, they typically have higher down payment requirements and interest rates because they are an unsecured form of lending with no form of security that can be used as collateral. This poses a high level of risk to lenders, especially in the case of land loans for bad credit.
What Types of Land Can I Get a Loan for?
1. Raw Land
Raw land is essentially undeveloped land that comes with no electricity, sewers, or even roads set up. And while it can be cheaper to purchase raw land, securing land financing can be difficult because it poses a significantly higher risk to the lender.
As a result, they come with high-interest rates, and you may even be required to make a land loan down payment that can equate to up to half the value of the loan, especially if you have a poor credit history.
2. Unimproved Land
Unimproved land is usually more developed than raw land, as it usually features some basic utilities and amenities but typically lacks a phone box, an electric meter, and a natural gas meter.
As a result, land financing for this type of land isn’t the most hazardous form of lending, which is why the upfront installments and financing costs tend to be slightly more affordable compared to raw land loans.
3. Improved Land
Unlike the previous two, improved land has full access to electricity, water, and roads, which is why the purchase price is often significantly higher. However, the benefit of taking out such a lot loan is that the down payment and interest rates tend to be significantly more manageable than the other two, due to the lower amount of risk posed to the lender.
What Are the Merits and Demerits of Land Loans?
The biggest advantage of taking out a land loan is that it allows you to quickly secure property in up-and-coming areas at a good value, whether it be to build the home of your dreams or for commercial purposes. They can also allow you to secure land as a form of future investment, since plots tend to offer a greater return than most other investment options.
They are a great way to secure land even with a less than stellar credit rating, as some land loan lenders are open to providing you with the funds you need, as long as you can show proof of a steady income stream.
On the flip side, since there isn’t a house that can be used as collateral, most land loans come with exorbitantly high interest rates and down payment requirements, as well as shorter repayment periods compared to typical home loans.
How Can I Apply for Land Loans?
Local Credit Unions and Banking Institutions
You can often get land loans from local banks and credit unions near the land you intend to purchase because they can often provide you with highly favorable lending rates and terms because of their knowledge of the local real estate.
However, the problem is that most local banks will often require you to prove your creditworthiness by having a good or excellent credit score before accepting your application, while most credit unions will only provide loans to eligible members.
USDA Loans and Grants
If the land that you intend to purchase is based in a rural area, then taking out a land loan from the U.S. Department of Agriculture (USDA) can be a viable option to consider. And while these loans tend to come with short repayment terms, they do have low interest rates, which are often less than the current market rate. However, in order to qualify, the borrower must be situated within a rural area.
Online Loan Marketplaces
Online loan marketplaces usually have a wide network of credit lenders that are capable of providing you with land loans with highly flexible credit requirements compared to traditional banks and credit unions. They can also facilitate loans that are usually processed much faster, which makes it a great borrowing option, especially if you happen to have a less than stellar credit history.
Alternatives to Lot Loans
Seller-financed Land Agreements
A seller financing is a land loan agreement where the seller handles the mortgage process directly, rather than working with an intermediary like a financial institution or credit lender. This means that you can secure favorable land loan terms because everything is essentially negotiable, from the down payment to the interest rate.
It is also a practical option for those who may find it difficult to qualify for a land loan or are unable to pay a large land loan downpayment. On the flip side, this form of land financing can be inconvenient because the seller still keeps the property title until you fully pay it off. Plus, the loan agreement could potentially come with loopholes and vague terms that end up costing you more over the long-run.
Second Mortgage
A home equity loan, also commonly referred to as a second mortgage, allows you to tap into the equity in your home, and its value is usually based on the difference between the property’s current market value and the owner’s mortgage balance.
It is a viable option that can often be better than any typical land loan since they don’t require any downpayment, come with lower interest rates, and have extended loan repayment terms that can vary between 5 and 30 years, depending on the lender. The only downside is that, should you default on this loan for land, you could potentially lose your home.
FAQs:
1. What is the maximum and minimum amount I can borrow?
The minimum loan amount that you can normally expect to borrow is between $50,000 and $100,000, while the maximum amount that you can get will usually be about 80% of the property value, which can go up to $2.5 million. However, it is important to keep in mind that this number also depends on a wide variety of factors like the land’s size, postcode, etc.
2. Are there land loans for bad credit?
Yes. You can secure land loans for bad credit, but most of these loans often come with strict lending criteria. However, if you are able to prove that you have a good credit history, then your chances of buying land with bad credit are higher. Fortunately, if you know where to look, you can find a land loan that is suitable for you.
3. Is there anything I can do to increase my chances of obtaining a land loan?
Land loan lenders will usually assess the same general criteria that are normally used to review any other type of home loan application. However, you can usually increase your chances of being approved by paying off all pre-existing debts to improve your credit score, canceling all unused credit cards, and increasing the size of the deposit that you make.
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