Buying a piece of land allows you to build your dream home or to simply maintain a piece of nature. But land can be pricey in higher demand areas, so you cold need to find a vacant land loan to fund your purchase. You might think that a land loan will be easy and low risk, but most lenders see a land loan as a risk. The approval process to finance vacant land can be more difficult than buying property that has been developed.
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The ease and cost of getting a loan will depend upon the land that you want to purchase. Is it land that you want to build a home on in the near future? Or is it raw land that you do not plan to develop?
Usually, vacant or raw land loans are for the short term, from two to five years before a balloon payment comes due. But there are longer term land loans or loans you can convert to a longer term loan, especially if you want to build a home on the land.
Buy and Build at Once
Lenders are most likely to lend for your vacant land loan when you have a plan to build on the property. It is no secret that land loans are not readily accessible from your typical mortgage broker or bank. Holding raw land is risky over the long term. While building is risky, too, banks are more at ease if you want to add value to the property.
A construction loan can be used to buy the land and pay for construction. This means there is less paperwork and not as many closing costs. You also can secure funding for the whole project and you do not have to be stuck holding vacant land when you are trying to get a lender.
To get approved for your construction loan, you have to show plans to the lender. It will want to see you have an experienced builder doing the job. Funds are paid out over time as the project meets certain steps. Your contractors need to follow the guidelines for the project if they want to be paid.
Construction loans are mostly short term loans and have interest only payments and often last less than a year. After that, the loan can be converted into a 15 year or 30 year loan. You might also refinance the loan with your new home as collateral.
For a down payment, you will need to pay at least 10 to 20% down of the future value of the home.
If you buy a piece of land that already has street access and utilities, you will have an easier time getting a loan. While raw land can be financed, lenders are more reluctant to lend. It is expensive for things such as sewer lines and electricity to be added. There are many ways for expensive delays to occur.
If you are buying raw land, you will need at least 30% down, while a finished lot can have a down payment of 10% or 20%. Some people need to bring 50% down to be approved.
Finished lot loans are less risky for the lender, so they are more comfortable offering a single step construction loan that will convert to a 30 year mortgage when the work is done. With an unfinished, raw lot, lenders will keep the term shorter in the five to 10 year range.
If you want to buy raw land, you can improve the chances of getting good terms if you help to reduce the risk to the lender. You should have a high credit score of 680 or more, have a low debt to income ratio, and take a small loan amount that has lower payments and property that is easier to sell.
If you want to purchase land with no plans to build on it, getting the loan will be more challenging. Still, you can check with local banks and credit unions to see if you can qualify. But vacant land lenders may expect a large down payment and a short loan term.
Also, if you have a lot of equity in your home, you might be able to use it in a 2nd-mortgage loan to fund the cost of the land you want to buy. But you are taking a risk if your home is collateral, so do this wisely.