A loan for land is used to buy raw land, recreational land, vacant lots, and agricultural property. These loans are different from traditional property loans since lenders consider the collateral as a lot less secure, with the loans being riskier. Typically, lenders will ask for higher down payments of as much as 30% or more. They will also charge higher interest or fees than traditional mortgages.
Getting a Loan for Raw Land
6 Specific Options for Land Loans
- USDA Rural Housing Site Loans – This is best for families with low to moderate income that want to build their primary house on a rural lot.
- Local Financial Institution Land Loans – It is great for local buyers interested to buy a building lot, recreational land, or farmland.
- Seller Financing – This is for buyers who cannot qualify for a more traditional loan for land or for cheaper parcels of land through sites like LandZero.com
- SBA 504 Land Loan – This is great for business owners who plan to buy a land for their commercial enterprise.
- Home Equity Loans – This suits buyers who already have equity in their personal homes and wish to use this to buy land.
- Land Company Loans – It is a good option for buyers who purchase through land brokers for mid range priced land and prefer to use built-in financing.
How Does a Loan for Land Work?
In general, a loan for land is used either for financing a property that is not built on in a substantial way or is not built on yet. It includes lending for buying agricultural and any similar acreage, energy-producing and mining land, recreational land, vacant building lots, and commercial parcels. A loan for land is not used to buy any existing property.
There are some instances when a loan for land is based on plans for building on the property. In other instances, such as in the case of ranching or farming, it is to use the land for productive use. There are also instances when it is merely to buy a parcel that could be used just for investment or recreation. Since there are different kinds of land loans available, there are also different kinds of borrowers that they are best suited for. Typically for land loans you would need collateral and a lot of the time your land does not count as collateral.
Developers or builders usually apply for a loan for land to build houses and condos on hoping to sell them in the near future. An individual buyer may also buy land where they will construct their dream house. Farmers may also buy land for growing their crops, building agricultural structures, or setting up related businesses. SBA land loans are used by businesses for commercial use.
When getting a loan to use your land for building. You will need to make sure you get title insurance. Both for the builder and for your land, so if you have any deed issues with your land all that work won't be in vain. This goes for any size land, seller financing, even on sites with land under $10k are usually not sold with title insurance. This keeps the price low, but you should make sure to get a warranty deed. With this type of deed, you should not have a problem getting title insurance when you are ready. If you bypass the title insurance, just get a title check for about $150.00.
Is it worth getting a loan
Getting a loan to buy land or build on your existing land. You need to determine if it is worth it. The last thing you want is to be upside down on your land. Meaning you got a loan for land purchase at $100k, and that land can only sell for about $40k. Even if you do sell it, you still owe the rest on the outstanding amount on the loan. When building a home, you should do some market checks. Can you sell this home for more then the land and home built. Can you rent it out if that is your goal, will it cover the payments on the loan at least. These are important things to consider or you will kinda screw yourself. Unless the plan is just to live out life in it because it is your dream home.
Can you do it without a loan
While this of course is always best so you can stay away from large interest rates. It is not always an option, but try to look into it. Shop around if you are going to get the loan as well. Don't just pick one quote and go with it. If you can use equity, then you could pull out money often and keep a lower rate rather then a large land loan rate. Also don't discount buying some cheap land and alternative housing options. Land that goes under $10k and building it yourself with a small amount of help, can put you living mortgage and loan free.
How Do Lenders Perceive a Loan for Land?
For lenders, a loan for land is a riskier investment since the collateral will not generate any income or offer a roof over a person’s head if it is just for the land purchase. It is also more likely for the buyer to default on the land loan. A lender can mitigate such risks through requiring a higher down payment. They can also charge higher interest rates and fees and expect a faster payback of the loan for land. So be prepared for that.
In conclusion, do your homework. Make sure this land is worth the loan if it is really pricy. Think of down times, like loss of a job or other financial issues. Can you still pay on the loan and pay your normal bills. If by emergency you need to sell it can you at least make some cash on top of the loan value. There is a lot to think about first before you jump in head first.
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