Wondering how land loans work? Perhaps you would like to buy a plot of land that will go perfectly with your future home? Getting a loan on a piece of land is a smart move, especially if you aren’t going to build your home right away.
Obtaining real estate finance is a great way to make your purchase on time. You can take out a mortgage on a property in the same way as you would on a house – the only difference and inconvenience is the valuation of the property. The property value is more difficult to determine compared to a home.
Let’s look at everything you need to know about getting a home loan to make your financing a simple and worry-free process.
Where do you get your loan from?
Banks or certain lenders will grant you land loans. You can find real estate lenders by looking around, possibly with a real estate agent, or doing your own online search. Local credit unions are a good place to start. Very often, local lenders are a good source for finding land loans.
Once you find the lender of your choice, they will analyze your credit history along with the market value of the property. Then they will make a final decision on your eligibility to purchase that land.
How Do You Get Land Loans?
The process of obtaining your home loan can take several forms; This is because there are multiple types of loans. However, in all real estate purchase transactions, it would be best to have good credit, good debt to income ratio, and steady income.
Land is considered a riskier investment than a building. This has a couple of consequences. First of all, you will have to pay more out of pocket for the deposit and the interest rate.
Second, land loans are mostly short-term. The real estate mortgage only lasts two to five years. If you are buying this land to build a house, you may get a longer loan.
Types of Land Loans
As mentioned earlier, the process of obtaining your home loan will vary depending on the type of loan you are applying for. Here are the most common types:
Raw land loans
This applies if you intend to buy raw land; That means there are no improvements or constructions. There are also no facilities: no electricity, no sewers, no road network, etc.
In this case, the risks are greatest for any lender. The risk increases proportionally to the time it takes to develop the land. Hence, this type of home loan is the most difficult to obtain.
Expect high interest rates and higher down payment requirements. For the raw land loan, you need to cover up to 50% of the amount. If you want to increase your chances of getting such a mortgage on good terms, you need to provide the lender with a thoughtful and efficient development plan.
Real estate loan
This is the right loan if you want to purchase a plot of land with a specific infrastructure such as gas, water and electricity. The land will most likely be used for construction development, which is a safer investment for lenders.
They will be more inclined to give you the real estate loan under such conditions. The better a property is, the better the chances of getting a real estate mortgage. As a rule, the terms of the contract also become more relaxed.
The interest rates are lower than on raw land loans because of the lower risk. You can expect the down payment requirements to be between 30 and 50%.
Building land loan
Anyone who is about to build their own home is much better off with a building loan. Construction loans provide funds to build the home that are then converted into a permanent mortgage.
This type is a two-in-one loan. You can apply for a loan that includes both the land you want to buy and the building you want to develop on that property. However, this requires great credit (over 700), low debt-to-income ratios, and high incomes – and the building development plans need to add real value.
In this case you still have a deposit of 10-20%. The blueprints must be developed by a professional and reputable developer.
You will also need to provide the exact construction schedule and cost estimate. The lender can even recommend several trustworthy builders. When you work with them, your chances of getting a construction loan increase significantly.
Remember that the lender is regularly inspected and involved in all stages of construction. You will receive your money in several drawings during the process. The drawing plan is agreed between you, the lender and the builder.
This type of mortgage loan is short term – the average is a year. During the construction period you will pay interest payments; then the loan becomes a home mortgage with a term of 15 to 30 years. The house can be built either as a modular construction or as a traditional floor house.
In general, all types of land loans are considered risky by any lender. So you can count on high interest rates right from the start. A good credit rating gives hope for better interest rates.
To give you a general idea, here are the average rates on a 10-year loan and a 30-year loan, respectively:
– For raw loans: 4.25-5.25% / 4.90-5.90%
– For lottery loans: 4-5% / 4.65-5.65%
– For construction loans: variable interest rate (approx. 5.25%)
Choose the country
You have a better chance of getting a home loan if you consider several aspects of the property:
– Limits: they have to be very well defined. It helps in determining the land value. Typically, lenders need a land line survey before deciding whether or not you are eligible.
– Limitations: Lenders want to know if the land is part of different ownership communities or covenants. It comes with liabilities that they may not want to make.
– Utilities: The more, the better your country can make a good impression on your lender. They appreciate access to paved roads, electricity, gas connection, sewerage. If any of them are missing, provide your lender with a thorough plan for adding them.
– Intended development: The value of the desired property increases when the entire area is built on, e.g. B. when shopping centers, residential buildings, highways etc. are planned. Present all of this to your lender and you will get your property loan quickly.
Land loans offer a great financing option for those looking to buy a piece of land in order to eventually either build their dream home or develop a business opportunity. You should now have a much better understanding of how land loans work.
Bill Gassett is a nationally recognized real estate guide who has helped people buy and sell MetroWest Massachusetts Real Estate for 33 years. He’s been one of the top RE / MAX REALTORS® in New England for the past decade. In 2018, he was the # 1 RE / MAX real estate agent in Massachusetts.