Purchasing unimproved or vacant land can be an exciting investment, but financing it requires some extra planning. An unimproved land loan calculator is an essential tool to estimate your loan terms and monthly payments. This comprehensive guide will cover how these specialized land loan calculators work and provide key tips for getting the best financing.
What is Unimproved Land?
Unimproved land, also known as vacant or raw land refers to a property that has no significant developments or improvements made to it. This may include
- Land with no structures built on it
- Forested acreage
- Empty lots in housing subdivisions
- Farmland or ranchland with only fence lines or irrigation
- Desert or mountain parcels with natural terrain
Lenders consider unimproved land riskier to finance than improved properties. As a result you’ll need to find lenders who specialize in land loans.
How an Unimproved Land Loan Calculator Works
A land loan calculator helps you estimate your monthly payment amount based on your loan details It works similarly to a mortgage calculator but with some key differences
Here are the key pieces of information needed:
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Purchase price: This is the amount you plan to pay for the unimproved land.
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Down payment: The upfront amount you’ll pay at closing, typically 10-30% of the purchase price.
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Loan amount: The amount you’ll finance, calculated as purchase price minus down payment.
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Interest rate: The annual rate charged on the loan, usually 6-9% for land.
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Loan term: The length of the loan, such as 15 or 30 years.
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Payment frequency: How often you’ll make payments, such as monthly or annually.
With these inputs, the calculator runs the numbers to determine your estimated monthly payment. It also shows the total interest paid over the loan term.
Many free online land loan calculators can help you play around with different scenarios. Be sure to also consider closing costs, which may add several thousand dollars.
Tips for Getting the Best Land Loan Rates
Since land loans are riskier for lenders, interest rates tend to be higher than conventional mortgages. But here are some tips to potentially get a lower rate:
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Shop around: Compare rates from multiple lenders, including banks, credit unions, and online lenders. Ask about discounts for a higher credit score or lower LTV.
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Make a sizable down payment: Putting down 20% or more shows you’re financially committed to the land purchase. This can help you qualify for better rates.
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Choose a shorter term: Opting for a 10 or 15 year loan means you’ll pay it off faster and likely save on interest. Just be sure you can afford the higher monthly payments.
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Have a plan for the land: Lenders want to see you have a specific purpose in mind, like building a home or starting a farm. Detailed plans make for a stronger loan application.
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Look for land loan programs: Some banks and agencies like the USDA offer special low-interest land loan programs that can save you money.
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Improve your credit score: Work on raising your score above 700 before applying for an unimproved land loan. This shows lenders you’re financially responsible.
What Factors Affect Your Rate?
When shopping around, you’ll find that interest rates can vary significantly between lenders. Here are some of the key factors that influence the rate you’ll be offered:
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Credit score: Lenders offer lower rates to borrowers with higher scores, typically 700 and above.
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Down payment amount: The more you put down, the less risk for the lender. A 20-30% down payment can earn you a nicely discounted rate.
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Debt-to-income ratio: Lenders will check this ratio to ensure you aren’t overextending your finances. Keep your DTI below 40-50% for best rates.
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Loan-to-Value (LTV) ratio: The loan amount divided by the property value. A lower LTV percentage signals lower risk for the lender.
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Land purpose: Plans to build a home or develop the land are viewed more favorably than leaving it vacant.
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Land type: Forested acreage or farmland may be seen as lower risk than barren desert or mountain parcels.
Common Loan Terms for Unimproved Land
Since land loans are riskier, you can expect to see some differences from a typical mortgage:
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Higher interest rates – Usually 0.5 to 2% higher than a home loan.
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Larger down payments – Often 20-30% is required. Some lenders may accept 10-15%.
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Shorter terms – Most lenders offer a maximum of 15 years. Some may go up to 30 years.
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Variable rates – Adjustable rates tied to an index are more common than fixed rates.
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Prepayment penalties – Refinancing or paying off the loan early may incur a penalty fee.
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No escrow – You pay property taxes and insurance separately instead of through an escrow account.
Always model multiple scenarios with an unimproved land loan calculator before applying. This will help you understand the true costs and find affordable monthly payments that work for your budget.
What Closing Costs Are Associated with an Unimproved Land Loan?
On top of your down payment, you’ll need to budget for closing costs when purchasing vacant land. These may include:
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Loan origination fee – 1% to 6% of the loan amount.
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Appraisal fee – $300 to $500 for the lender’s appraisal.
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Credit report fee – $25 to $100 per person.
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Attorney fees – Around $500 if you use an attorney to review documents.
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Recording fees – To record the deed and mortgage, around $50 to $500.
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Title fees – $200 to $2000 for a title search, exam, and insurance policy.
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Survey – Typically $1000 to $5000 to survey the land boundaries.
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Inspections – If required, around $300 to inspect for issues like soil stability, flooding, etc.
Closing costs for an unimproved land purchase typically total 2% to 5% of the property price. Account for these added fees in your loan amount request.
What are Some Alternatives to Unimproved Land Loans?
Unimproved land loans often come with higher rates and stricter requirements. If you’re having trouble qualifying for financing, here are some other options to consider:
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Seller financing – The seller provides all or part of the financing at private sale terms.
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Owner financing – A third party provides financing in exchange for an interest rate premium.
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Crowdfunding – Use a crowdfunding platform to raise funds from multiple investors.
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Home equity loan – If you have sufficient equity in an existing home, you may be able to tap it to purchase land.
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401(k) loan – Allows you to borrow against your retirement savings without tax or penalties.
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Personal loan – An unsecured personal loan with fixed payments and terms. Useful for smaller purchases.
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HELOC – A Home Equity Line of Credit offers flexible borrowing that may work for vacant land purchases.
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Hard money loans – Asset-based financing from private lenders at higher interest rates.
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Lease-to-own – Lease the land first, then purchase it outright after 1-3 years.
Key Takeaways on Unimproved Land Loan Calculators
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An unimproved land loan calculator helps estimate your monthly payments by inputting your loan details. Be sure to account for closing costs too.
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Interest rates are typically higher than mortgages, so shop around for the best deal and focus on improving your credit score.
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Make a sizable down payment of 20-30% if possible, choose a shorter repayment term, and have a solid plan for the property.
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Carefully compare loan terms from multiple lenders and run the numbers through a land loan calculator.
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If you don’t qualify for financing, seller financing, personal loans, and other alternatives may be worth considering too.
For any major land purchase, it’s essential to crunch the numbers with an unimproved land loan calculator first. This will help ensure you get affordable payments that fit your budget and financing needs.
Land Loans vs Traditional Mortgages
Banks and other lenders tend to view land loans with a wary eye, and consider them to be more of a risk than a standard mortgage. The reason for this is simple. Borrowers are much less likely to walk away from a home loan, particularly if the property is being used as a primary residence. Moreover, a house on a lot has greater value on the open market, and makes for a more secure form of collateral. Undeveloped land, on the other hand, doesnt deliver the same degree of investment security for the creditor.
People are much more likely to walk away from a land loan than a mortgage, potentially leaving the lender with an unimproved parcel of land which they will have to sell to recoup their losses. Consequently, land loans can be more difficult to obtain, particularly if you dont have a definite plan in place to improve the property and increase its value. Banks also tend to charge a higher rate of interest to offset the additional risk.
There are a number of variables that can influence your financing options when buying a piece of land. The most important of these is the land itself, its location, and how it will be used. While any parcel of land has some intrinsic value as a real asset, you are much more likely to be approved for a loan if you can show that it also has value as an investment. Location is key, and lenders are much more likely to underwrite a loan for a prime piece of desirable real estate than for a plot of land in the outskirts of nowhere. Should you default on the loan, they will have an easier time disposing of the collateral and offsetting any potential losses.
Another key consideration for lenders is the nature of the land you will be buying. For example, raw land is deemed a far greater risk, and is much more difficult to finance. Thats because it lacks any man-made improvements (clearing, roads, sewer, water), and it will take a major influx of time and money to increase the lands market value. Buying raw land can be significantly cheaper than buying already improved land, but it will be harder to find a lender willing to finance your purchase. If you do find a lender willing to work with you on your purchase of a raw parcel, you may find that your loan will fall under the umbrella of commercial lending, in which case you should expect higher interest rates and more restrictive repayment terms.
Finally, lenders are also interested in how youre going to utilize the land itself. Do you have plans in place to further improve the land, bringing it up to local codes and preparing it for construction? Are you planning to build on the land immediately, or will you be holding onto the parcel as an investment property? These are important points to consider, because they can greatly impact your ability to get a loan written at favorable terms. If you are planning to build on the land immediately, and you have construction plans in place, you are more likely to be approved by a lender. Moreover, you may qualify for a construction-to-permanent loan covering both the purchase of the land and the building project.
If you are shopping for a land loan, the first place to start is with a local bank or credit union. Local is key here, because as part of the community the lending institution will have a better idea of the value of the land you are planning to purchase. Local lenders also have a vested interest in the growth and sustainability of the community itself, and as such may be more likely to underwrite a land loan than a national lender with little or no regional presence. That being said, when borrowing money from a local bank or credit union you should be prepared to overcome some challenges, and you may have to shop around until you find a lender willing to give you a loan with satisfactory terms and interest rates. Keep in mind, that lenders consider land loans to carry a higher risk, particularly if you have no immediate plans to build on your lot, and as such they may be subject to the following restrictions:
Lower Lending Limits – Even if your credit is in great shape, the lender may put a cap on the amount of money you can borrow against your purchase. Again, this is to offset the inherent risks associated with land loans. People with bad credit will have even lower limts.
Larger Down Payments – Land loans typically require a larger down payment than traditional mortgages, often as much as 20% to 30% of the asking price. If you are purchasing raw land, the preferred down payment can be as much as 30% to 50% of the total cost.
Higher Interest Rates – Again, due to the high risk nature of land loans you should expect to receive a higher than average interest rate from your lender.
Shorter Loan Terms – Land loans typically have shorter, and more restrictive, repayment terms. You may be able to extend the loan terms if you qualify for a construction-to-permanent loan. If you are intending to purchase raw land, you should expect the loan terms to be even more restricted, with terms be limited to under 10 years.
While it may be easier to secure a loan from a local bank or credit union, you should be prepared to pay some additional fees over and above the cost of the loan itself. These fees are mandatory, and are used to cover the following requirements:
- Title Search
- Title Insurance
- Land Appraisal
- Land Survey
- Attorney Fees
As always, the bank or credit union will review your personal credit history before approving you for any loan. It will also have a significant impact on how that loan is written, what interest rates you are offered, and how much of a down payment you will be required to pay up front. Before you apply for a land loan, review your credit report and credit score so you can come to the negotiating table fully informed.
Owner financing is an attractive alternative to traditional lenders, and in some cases may be easier to obtain. Of course, in this scenario financing is entirely left to the discretion of the land owner, so you will have to be prepared to negotiate a favorable deal. Still, if you have been turned down by your bank or credit union, owner financing is your next best option.
When it comes to buying land, there are two basic forms of owner financing – ‘contract for deed and ‘mortgage/trust deed. Each has its own advantages and disadvantages for both buyer and seller.
Sometimes referred to as a ‘land installment contract, this allows the buyer to pay the land owner in installments over a predetermined period of time. Typically, there is a final balloon payment that further compensates the seller for financing the purchase. The upside of contract for deed financing is that it is often easier to obtain, particularly for people with poor credit scores or less than perfect credit histories. The downside is that the seller retains the deed to the land in question, and only transfers it when the debt is fully paid. If you, as a buyer, are thinking long term this is an excellent solution. However, if you have a construction plan in motion it will be delayed until rights to the land are fully transferred.
Also called a ‘deed of trust‘, in this option the seller will issue a deed to the buyer in return for a promissory and mortgage contract. The promissory note guarantees payment to the seller, and the mortgage acts as collateral against the promissory note. The benefit here is that the buyer has immediate access to the land, so you begin construction as soon as youre ready. The downside is that you will have to negotiate with a third party lender to establish the mortgage. However, having a building project in motion should make it easier to secure a mortgage to back up your promissory note.
Home Equity and 401(k) Loans
Finally, if you have sufficient equity in your home, you might consider borrowing against it to pay for your land purchase. The advantages here are clear. Home equity loans are fairly easy to obtain (assuming, of course, that your credit is in decent shape and your mortgage payments have been handled responsibly). Home equity lines of credit also carry fairly low interest rates, and very favorable repayment terms. Depending on the cost of the land you are planning to purchase, this can be an ideal solution.
Using the assets in your 401(k) to buy land may be an option, but only if your employer is willing to allow you to borrow money from the companys retirement plan. There is no law requiring employers to allow employees to borrow from their existing 401(k), so this option may not be available to everyone. Its worth noting, however, that even if you are authorized to borrow against your 401(k) you will only have access to a limited short term loan. Depending on the cost of the land you want to purchase, this may or may not be sufficient. Having said that, borrowing against your retirement savings can be a lower cost alternative to traditional financing.
Land loans are typically more difficult to obtain than other secured loans, but any challenges to your loan application can be overcome if you have a definite plan in place to improve the land and increase its value as an investment opportunity for your lender.
As with any loan, you should be prepared to shop around for the best options, and take the necessary time to secure the best deal possible. Because land loans are considered riskier investments, they often come with more restrictive terms and conditions, so it is doubly important to understand your current financial status and to have a plan in place to repay the debt on time and in full. Borrowers have very little wiggle room when it comes to land loans, and it pays to think a few steps ahead. As always, before signing any contracts be certain that you fully understand the terms and conditions of your loan, and your responsibilities as a debtor.
How to Get a Land Loan (And What to Know Before You Do)
FAQ
Why are interest rates usually higher for loans on unimproved land?
What is the longest loan you can get for land?
How much would a $90,000 loan cost?
How to calculate a land contract payment?
What is a vacant land loan calculator?
Vacant Land Loan Calculator to calculate monthly mortgage payments with a land contract amortization schedule. The land mortgage calculator returns the payoff date, total payment, and total interest payment for your mortgage.
How much does a land loan cost?
The monthly land loan payment would be $1,060.66 for 10 years. Once you have found your loan payment amount, you can now find your total payment amount and the total interest cost of your land loan. Your total land loan payments would be your regular loan payment amount multiplied by the number of payments that you have to make.
How does a land loan calculator work?
This land loan calculator computes monthly payments & the total interest based on the purchase price, downpayment amount, interest rate and number of monthly payments. Are you buying a house or car? If so, we also offer custom calculators for home loans & automotive loans.
How do I calculate land loan payments?
Calculate land loan payments using monthly, quarterly, semiannual or annual payment schedules. What will my land loan payment be? Ready to apply for financing? Get Started The actual loan payment amounts may vary depending on the interest rate, closing date and other factors. This is an estimate of loan payments.