Are you thinking about getting a loan for land? Below is a complete guide to vacant land loans. With the Federal Reserve pledging to not raise rates more in 2024 and mortgage lenders expanding their guidelines on land loans, you can expect many investment and construction opportunities to arise as a result. Keep this article as a reference so that you can get the best financing deal and land loan rates.
Check Out Land Loan Programs for Experienced Lenders and Mortgage Brokers Offering Competitive Interest Rates.
Land loans are valuable financial tools for those seeking to purchase land. By understanding the types, considerations, and terms associated with land loans, you can make informed decisions on your land acquisition journey. Whether your goal is to build your dream home, invest in farmland, or secure a piece of nature for recreational purposes, a land loan can be the key to achieving your vision.
What You Need to Know about Getting Approved for a Land Loan Today
Land loans, often an enigmatic topic for many, are financial tools designed specifically for purchasing land. Whether you aspire to build your dream home, establish a farm, or secure a piece of nature, understanding land loans can help you achieve your goals. This article delves into the realm of land loans, clarifying what they are, how they work, the types available, and the considerations to keep in mind.
What Is a Land Loan?
A land loan is a specialized financial instrument that facilitates the acquisition of land. These loans differ from typical mortgages or construction loans, as they specifically target the purchase of undeveloped or vacant land. Land loans serve the purpose of helping buyers secure land for various purposes, including building a home, creating agricultural properties, investing, or merely preserving a beautiful parcel of nature.
How Do Land Loans Work?
Land loans function in ways similar to conventional mortgages, but with some distinctions. They offer borrowers a principal amount to purchase land, and the borrower agrees to repay this sum, with interest, over a specified period. The interest rates and terms of land loans can differ depending on several factors, including the lender, the borrower’s financial situation, and the intended land use.
Types of Land Loans
Land loans come in different varieties, catering to the diverse needs of potential buyers. Here are the primary types:
1. Raw Land Loan: These loans are used for the purchase of undeveloped land without infrastructure, such as utilities or road access.
Key Consideration: Raw land loans typically have higher interest rates and may require larger down payments because of the increased risk.
2. Improved Land Loan: Improved land loans are for purchasing land with existing infrastructure, such as utilities and road access.
Key Consideration: These loans are often less risky for lenders, which can lead to more favorable terms and rates.
3. Agricultural Land Loan: Meant for buying farmland for agricultural purposes or investment.
Key Consideration: Agricultural land loans may have unique conditions, such as restrictions on land use.
4. Residential Land Loan: Designed for residential purposes, such as building a primary or secondary home.
Key Consideration: Residential land loans are closely related to construction loans, as they often transition into financing the home’s construction.
5. Recreational Land Loan: Targeted at buying land for recreational purposes, such as hunting, fishing, or a getaway spot.
Key Consideration: Terms may vary, and these loans are generally for shorter periods.
More Considerations for Land Loans Before pursuing a land loan, several key considerations should be kept in mind:
1. Down Payment: Land financing typically require larger down payments than mortgages for homes. The down payment can range from 20% to 50% or more, depending on the lender and land type.
2. Interest Rates: Interest rates on land loans are often higher than those on traditional mortgages. Rates vary based on factors like the borrower’s credit score, the loan type, and the lender.
3. Loan Term: Land loans generally have shorter loan terms compared to home mortgages. Terms often range from 5 to 20 years, and some may require a balloon payment at the end.
4. Infrastructure and Zoning: Consider whether the land has necessary infrastructure (utilities, road access) and complies with zoning regulations. These factors can influence the loan terms.
5. Loan-to-Value Ratio: Lenders may evaluate the land’s loan-to-value (LTV) ratio, which compares the loan amount to the land’s appraised value. A lower LTV may lead to better terms.
6. Land Appraisal: Land loan lenders often require a professional land appraisal to determine the property’s value accurately.
Why Choose a Land Loan?
Land loans are chosen for various reasons, including:
Investment: Buying land can be a sound investment that appreciates over time.
Customization: It allows you to select a specific location to build a custom home.
Agriculture: Ideal for those looking to start or expand farming operations.
Recreation: Perfect for securing a tranquil retreat or recreational property.
From the lender’s perspective, loans for land are some of the riskiest loans. That said, this will depend upon the type of land that you want to buy and what you want to do with it. The most likely way to be approved for loans for land if you show that you are going to use it immediately and have a use for it.
What is a USDA Land Loan?
USDA land loans are backed by the U.S. Department of Agriculture’s (USDA) rural development program, are designed to assist individuals and families in acquiring land in eligible rural and agricultural areas for various purposes. These loans serve those with aspirations ranging from agricultural ventures to residential building. Unlike traditional mortgages, USDA land loans offer distinct benefits. They typically feature competitive interest rates and longer repayment terms, making them a cost-effective choice for land acquisition.
To qualify for a USDA land loan, applicants must meet certain eligibility criteria, including having a stable income, a credit score that meets the lender’s requirements, and a demonstrated capacity to repay the loan. The intended land use must align with USDA loan guidelines, typically involving agricultural or residential purposes.
One of the unique aspects of USDA land loans is their focus on supporting rural development, promoting economic growth, and expanding homeownership opportunities in rural areas. While USDA construction loans have specific requirements, they provide a valuable avenue for individuals and families to purchase land in rural and agricultural communities, fostering growth and prosperity in these regions.
Here are More Vital Considerations When Getting a Land Loan:
#1 What Improvements You Intend to Make on It
The hardest type of land loan to get without question is for raw land that has not been improved, and which you do not intend to improve. Raw land means there are no structures on it, utilities or sewers. If you want to get a raw land loan, you can expect to need to put down a hefty down payment as high was 50%. Also note that the rates for a raw land loan are usually higher.
#2 Have Construction Plans to Get a Better Deal
Getting an improved land loan with plans for future construction is the easiest type of land loan to acquire. This means that the piece of land has been zoned and has many of the features that raw land does not have. Banks like to see construction plans on the piece of land because that eventual construction will lead to higher values for the lender in case you do not pay the loan. Compare HELOC and Construction Loan Options.
#3 Know the Land and Geography Well
Before you consider getting a land loan, you need to really understand the area where you want to buy. You should pay a surveyor to review the property for you, get title insurance and see how good the access is to the property.
It is a good idea to use a local lender for land as they probably know the area where you want to buy.
#4 Understanding Your Land Financing Options
The most popular way to get a land loan is to use a third-party loan from a bank or other type of lender. However, keep in mind that a third-party loan is not always easy to get, and the cost may be higher due to the various lender requirements. Land loan rates can vary dramatically, so talk to several sources. These typically include:
- Title search
- Title insurance
- Land survey
- Closing costs for the attorney
With a regular bank, the credit score of the borrower and his or her financial strength is of most importance. Whether you can get a loan or not for the property that you want will depend upon the size of the project, the location and how feasible your plans are for the land. Generally, only the best projects with those with good financial strength and credit will be considered. You will usually need to come to the deal with at least a 30-40% down payment, and there will be full recourse to the borrower, and rates can be high.
If your land project does not meet the above criteria, you may need to look at other sources for financing. Community banks have been a popular option in the past. You also may be able to find a private finance organization or a capital fund. Some advisors recommend using a blanket loan, You still will need to come to the deal with equity in the deal of 30-40%, and origination points could be in the 3-5% range and up to 10% interest.
#5 Consider Owner Financing for Land
Owner financing is a good option to a third-party loan. Most often, owner financing is done with a land contract. With a land contract, you the land buyer make payments by installment. Many owner finance deals with a land contract may have a final balloon payment.
But with a land contract, you do not actually own the land until you have paid off the purchase price. So, you will not actually get title to the property until the entire debt has been paid. The seller also keeps full interest in the value of the land until you have paid the purchase price.
#6 Consider a Home Equity Loan or 401k Loan
Some people take out a home equity loan to buy land that they want to improve, such as to use to build a second house. If you decide to do this, there is less risk for the lender as they have collateral with your current home. A refinance may also be possible if you do not have sufficient equity in the property.
A 401k loan is also a good option for a short-term land loan. Note that your employer may not allow you to do this type of loan, but some will.
#7 Consider a Portfolio Loan or Credit Union
A portfolio loan is simply one that is not sold after the loan is done. Many big banks sell their loans after closing to a servicing agency so that they can free up their capital and do more lending. Some specialty lenders and credit unions may keep some of their loans in house. This means that the loans do not have to meet secondary market standards and can be more creative.
Even if this is a possibility, the lender will still want to see you are in a strong equity position and will want a 20% or more down payment.
The Bottom Line on Land Loans
Many people dream of buying a piece of land and building their dream home on it. There are a variety of ways that you can get a land loan. Just remember as we noted above that you will need to have good plans for what you intend to do with the piece of land to get approved for the loan. We think one of the best options for financing and considering land loan interest rates if you can is to pull cash out of a current property until you get the home or improvement completed.
References: Type of Loan Needed to Purchase Land. (n.d.)