In other words, there are few added improvements to the plot. Again, you should have a solid credit score, down payment and plan for the land. One of the best places to look for a land loan is your community bank or credit union.
Local financial institutions will have a good idea of how the surrounding land can be used and have more flexibility when it comes to working with customers. The USDA provides land loans to borrowers who plan to build a primary residence in a rural area. Or if you want to hire a contractor to build it for you, apply for a Section loan, which charges interest based on the current market. The SBA offers two types of land loans, including the:. Finally, you may be able to work out a financing deal directly with the person who is selling the plot of land.
This option may eliminate the hassle of tracking down a third-party lender and applying for a loan, but an individual seller may want to receive a much larger down payment and be repaid within a couple of years. Be sure that if you do take this route, you get the details of the agreement down on paper and even consult with a lawyer. There are also a few financing alternatives that you may find more ideal than a traditional land loan.
Local lenders will have the ability to assess the land and its potential, as well as the flexibility to offer better terms. You can also turn to the web. Online lenders have little overhead, which means they can pass on those savings to you in the form of lower rates and fewer fees. Whichever lender you choose, be sure to spend time evaluating all of your options and crunching the numbers.
Casey Bond is a seasoned personal finance writer and editor. Casey is also a Certified Personal Finance Counselor. Follow her on Twitter CaseyLynnBond. Select Region. United States. United Kingdom. Casey Bond, Mike Cetera. Contributor, Editor. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations. What Are Land Loans? Land loans are considered riskier than a mortgage or many other types of loans because: Default rates are higher on land loans than home loans.
There are many reasons you could default on the loan—maybe construction plans fall through or you run out of money. Borrowers are more likely to walk away. If you do fail to make your payments, your unimproved land is less attractive than property that can go to foreclosure auction.
While you don't need immediate plans to build on your land to receive a land loan, having the intent to build can assist in securing the funds. This is due to lenders viewing no intention to build at all a higher risk than a borrower who would be planning to build within a few years of owning the land. It is important to note that to get a vacant land loan as a home loan, the land and eventual property will need to be used for personal or investment purposes and not as a farm.
In some cases you may be able to use your land as a hobby farm, that generates little income from the farm production. A construction loan , or builder loan, is a type of home loan where the funds are drawn down as your property is being built in progress payments.
The main difference between a construction loan and a vacant land loan is the timeframe to build the property. During the time of taking out a construction loan, the lender will usually set a maximum time limit for you to completely draw down on your loan for when construction is completed. Whereas you are not obligated to build on your vacant land once taking out a vacant land loan. Another difference between these two home loan types is a construction loan will involve determining the full amount of funds you will receive to purchase the land and build your home, whereas a land loan will only involve the funds needed to purchase the land.
The interest rates for vacant land loans are generally higher than the rates on typical home loans. This is due to land loans having a higher risk associated with them to lenders. As land prices tend to fluctuate more frequently than existing homes, and vacant land will generally take longer to sell than an existing home, lenders are more likely to take a more conservative approach when providing a loan to only buy land. Get a free home loan quote today for an estimate of what you could borrow including the costs and fees involved or speak to your local Mortgage Choice expert today to understand what interest rates would be available to you.
A house and land package can come in two varieties. The benefit of a house and land package is that it gives you the opportunity to personalise your home to your taste. Another main benefit that makes house and land packages an affordable option is the savings you can get on stamp duty.
When buying a house and land package, as long as construction has not started on your new home, the stamp duty calculated will only be on the value of the vacant land you buy. You can calculate how much your stamp duty could be using our calculator here. While a house and land package can be an exciting and affordable choice, there are some drawbacks and hidden costs to watch out for.
Some land loan lenders require a substantial down payment — ranging from 20 percent to 50 percent of the purchase price — and charge higher interest rates. Some land loans have significantly shorter repayment terms than a or year mortgage, as well, or other requirements, like a cap on the amount of acreage.
The process of applying for a land loan and receiving the funds, however, is somewhat similar to that of a typical mortgage.
Some land loans are structured as balloon mortgages , with interest-only or no payments for a set time, then the balance coming due in one large payment. Community banks and credit unions are more likely to offer land loans than large national banks.
Your best bet is to find a lender with a presence near the land you want to buy. Local financial institutions usually know the area and can better assess the value of the land and its potential. Both loans are designed for low- to moderate-income families and have a repayment term of just two years. The interest rates, however, can be low. Section loans, for instance, charge just 3 percent, while Section loans charge less than the current market rate, with the rate on your specific loan fixed at closing.
With a loan, you, the SBA and a lender help contribute to the costs of the land purchase:. The interest rate on a loan will be based on current market rates. The other terms of the loan can vary by lender, however. If you already have a home with significant equity, it might be worth getting a home equity loan instead of a land loan.
Depending on the lender and the loan, the repayment term could be between five years and 30 years. The big downside is that if you default on the loan, you could lose your home. In some cases, the person or company selling the land might be willing to offer owner or short-term financing. One lender might help you finance up to 85 percent of the cost of developed land, for example, or 70 percent of the cost of raw land.
Keep in mind that how much you can borrow is directly related to how much cash you have and can put down on the transaction. Depending on the property and your down payment and creditworthiness, you could end up paying a higher rate than that. Before you start looking for a loan, Fleming recommends developing a comprehensive plan for what you want to do with the land. That can help you determine what type of loan and terms are best for your goals.
You can also use these sites to connect with a real estate agent who specializes in land purchases. It can be a good idea to work with a broker experienced in land loans, but if you want to shop around yourself, one place to start is to see if you qualify for any of the government-sponsored loan programs. You might also want to get in touch with local lenders and credit unions, who could be more likely to extend you this kind of financing.
Run a quick search online to find land loan providers in your area. Make sure you read the requirements carefully and reach out to a loan officer to talk about your situation and your chances of getting approved.
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