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You probably won’t be able to obtain a conventional mortgage to pay for the purchase of property on which you plan to construct a home or operate a business. If you want to own the land outright, however, you’ll probably have to opt for a land lease or submit an application for a land loan.
However, there are fewer options because land loans are less common than conventional mortgage loans. You might have to make a larger down payment than you would with a conventional mortgage, pay a higher interest rate, and have less time to repay the loan because there may be less competition among lenders. It’s crucial to understand what you’re getting into and how to cut costs before applying for a land loan.
What is a land loan?
A piece of land can be purchased with the help of a land loan. Depending on the kind of property you want to purchase, there are a few different types of land loans:
According to Casey Fleming, a mortgage advisor at Silicon Valley Mortgage and author of The Loan Guide: How to Get the Best Possible Mortgage, land loans make up a very small portion of the lending market and are typically riskier for lenders than mortgage loans. There is no assurance that a lender will get their money back if they have to foreclose on a land loan.
In the event of a financial event in their lives, owners of raw land are much more likely to stop making payments and leave the property, according to Fleming. “If you own your own home, you’ll take any necessary measures to protect it.” With raw land, you cannot utilize it or profit from it. ”.
Because there is less demand for vacant land than there is for lots with existing homes, it is much more difficult to sell vacant land than lots with existing homes.
Most people find it difficult to purchase land and construct a structure on it, according to Fleming. “It takes a lot more effort and money than people anticipate.” People want something they can start with and improve upon, even if it needs some work. ”.
Even though there are fewer lenders offering land loans than other forms of home financing, it is still advisable to shop around to ensure you are getting the best terms.
How do land loans work?
Some land loan lenders require a substantial down payment — ranging from 20 percent to 50 percent of the purchase price — and charge higher interest rates. Others have significantly shorter repayment terms than a 15- or 30-year mortgage, as well, or specific requirements, like a cap on the amount of acreage. Credit reporting agency Experian advises that people who are seeking a land loan should anticipate needing a credit score in the high 600s to the low 700s at a minimum, as well as a debt-to-income ratio of no higher than 43 percent. You may not get approved at all unless you submit a detailed plan for what you want to do with the land. As of late 2022, you can probably expect an interest rate of 7 percent or higher.
However, the procedure for requesting a land loan and receiving the money is somewhat comparable to that of a standard mortgage. The lender will check your credit and assess the financial information you provide to make sure it corresponds to what is on the application. If you intend to construct on rural property, you might have success obtaining a USDA land loan. A Section 523 loan can be used if you want to build your own home. To obtain a Section 524 loan, you must be hiring a contractor.
If you are accepted, the lender will pay the seller with the loan proceeds, and you will pay back the lender with interest over a specified period of time. Some land loans have a balloon mortgage structure, where the remaining balance is due in one large payment after a predetermined period of interest-only or no payments.
Fleming advises having a plan to pay it off before the required payment is due.
Your ability to obtain a land loan will be determined by a number of elements, including the kind of land you’re purchasing and the lending institution’s preferences. For instance, one lender might assist you in financing up to 85% of the price of developed land or 70% of the price of raw land. Remember that your creditworthiness, the amount of cash you have on hand, and the size of your down payment all have an impact on how much you can borrow.
Because land loans carry more risk, lenders tend to charge higher interest rates. Experian puts the current rates at about 7 percent. FBN Finance, a major player in the field, is quoting just over 7.5 percent for its 30-year Farm Land Loans. The rate you’ll receive is also tied to your down payment amount and creditworthiness. Because these loans tend to be more expensive, it’s all the more important to take your time to compare multiple lenders before you settle on one.
Types of loans for land purchase
Compared to large national banks, community banks and credit unions are more likely to offer land loans. Finding a lender with a location close to the property you want to purchase is your best option. Local financial institutions typically have a better understanding of the region and can determine the worth of the land and its potential
According to Fleming, interest rates will be high if you don’t intend to develop the land, and a lender may require a down payment of up to 50%.
Shop around before applying, just as you would with any loan.
USDA Rural Housing Site loans
If you intend to construct a primary home in a rural area, the U S. Department of Agriculture (USDA) has two loan options to consider:
Both loans have a two-year repayment period and are intended for families with low to moderate incomes. The interest rates, however, can be low. For instance, Section 523 loans have a rate of just 3%, while Section 524 loans have a rate that is lower than the going rate in the market and is fixed at closing.
SBA 504 loans
You may be eligible for a 504 loan from the U.S. Small Business Administration if you’re a business owner who intends to use the property for your company. S. Small Business Administration (SBA). You, the SBA, and a lender all contribute to the costs of the land purchase with a 504 loan:
A 504 loan’s interest rate is determined by current market rates. However, the loan’s other conditions can differ depending on the lender.
Home equity loans
It might be wise to obtain a home equity loan rather than a land loan if you already own a house with a sizable amount of equity. A home equity loan doesn’t require a down payment and typically has a low interest rate because it is secured by your house. Loan terms range from five years to 30 years.
The major drawback is that you risk losing your home if you default on the loan. Additionally, because you won’t use the loan to purchase, construct, or significantly improve the house used as security, the mortgage interest you pay won’t be tax deductible.
In some circumstances, the person or business selling the land may be eager to provide owner or temporary financing.
But unlike a community bank or credit union, the typical seller isn’t in the lending business and doesn’t have a large portfolio of loans. Thus, you should prepare for high interest rates and a sizable down payment. Also, it’s unlikely you’ll get a long repayment term. Only take into account this choice if you are ineligible for all other types of land loans.
Pros and cons of land loans
Since land loans are only useful in a small number of situations, most homebuyers don’t benefit from them. Here are some scenarios in which they may and may not make sense for you:
Not everyone should take out a land loan to buy an empty lot and start from scratch, according to Fleming. “However, those who do are typically quite content once their project is complete.” ”.
How to get a loan to buy land
1. Develop a plan. Fleming advises creating a thorough plan for what you want to do with the land before you start looking for a loan. That can assist you in deciding which loan type and terms are ideal for achieving your goals. A written plan may also improve your chances of later loan approval; many lenders won’t approve a loan if you don’t specify how you intend to use the money.
2. Search for properties. If you haven’t found a site yet, use websites like LandWatch, LandSearch and Land.com to search for properties based on your preferences and what you plan to do with the land. You can also use these online platforms to connect with a real estate agent who specializes in land purchases.f
3. Check your credit score. You don’t want to hurt your chances of getting a land loan by applying with a low credit score because getting a land loan is already difficult. If you haven’t already, check your score now and make a plan to reach 700. This might entail paying off credit cards or delaying the removal of past late payments from your record for a number of months.
4. Shop around for the right lender. It’s crucial to compare rates, just like with any other type of loan. Working with a broker with experience in land loans can be a good idea. If you want to do your own comparison shopping, start by figuring out whether you are eligible for any of the government-sponsored loan programs. Additionally, it is advisable to contact regional lenders and credit unions as they might be more likely to provide you with this type of financing.
You could also find financing for a land purchase by performing a quick online search for land loan providers in your area. Be sure to carefully read the requirements before contacting a loan officer to discuss your situation and chances of approval.
Your next step is to get in touch with a construction loan lender if you already have a land loan in place but didn’t obtain it through the SBA or USDA programs. For more information, see Bankrate’s guides to mortgage construction loans and some of the top construction loan lenders.
How much is a downpayment on land in Florida?
Larger Down Payments for Traditional Financing Alternatives – Land loans frequently demand a larger down payment than conventional mortgages, sometimes as much as 20% to 30% of the asking price. The preferred down payment for buying raw land can range from 30% to 50% of the total price.
What type of loan requires 10% down?
FHA Loans. Conventional loans have stricter credit requirements than FHA loans. With a down payment of just 10%, FHA loans, which are insured by the Federal Housing Administration, allow for approval with credit scores as low as 500.
Can you get a loan on land in Florida?
If you meet the requirements, a lot of financial institutions will be glad to provide you with a land loan. Nevertheless, you might have to go through a unique program, like the USDA loan program or the Small Business Administration, which provides SBA 504 loans.
What is a good credit score for a land loan?
Because there are various types of land loans, each has specific requirements that borrowers must meet. However, there are still fundamental requirements that are taken into account when a borrower submits an application for a land loan: