What’s your dream home like, and what do you need to fund it? Does a portable house with earthly color tones and a nice sofa set sound like your thing, or would you rather have a big, colorful seaside escape? If the image in your head already exists in reality, getting a home loan and outrightly buying this home may be the better option. However, if you like a bit more customization and fancy building from the ground up, then a land loan, no doubt, is what you should be gunning for.
What Are Land Loans?
Land loans, also known as lot loans, are loans taken out to buy a tract of land for further improvement, development, or simply an asset purchase.
While mortgages look like land loans on many fronts, there are still subtle differences between both worlds, one of which is the repayment window. This is usually smaller for land loans (typically between two and five years) than for conventional mortgages (30 years).
Most times, land loans are usually paid off with one balloon payment, while conventional mortgages are paid off with fixed, monthly payments throughout the life of the loan. Heavier down payments may also be required of home loans than are required of land loans.
How Do Loans for Land Work?
Here’s the deal. The process is nothing different from getting a mortgage. Like with every mortgage loan, you need a good credit score and debt-to-income ratio to increase your chances of qualifying for a land loan.
Since land loans typically have no collateral, they are often considered a high lending risk to many lenders. These lenders may then charge high-interest rates to offset this risk.
Also, the borrower’s credit score must be high. A FICO score of 720 and higher is a good place to start. You may also need to explain what the land will be used for.
After approving the borrower for a loan, they may be asked to make a down payment, and pay in full as agreed on or before the payment deadline. Certain borrowers may choose to refinance their loan into a traditional mortgage should they buy land, then construct a facility on it.
What Are the Types of Land Loans?
Raw Land loan
Raw lands are like the proverbial double-edged sword; on one side, cheap, and so, attractive to buyers, on the other, risky for lenders since it takes longer to develop. They are exactly what you might have thought them to be; virgin lands that have not been developed. These lands are devoid of any infrastructure whatsoever. Zero electricity, sewer lines, or drainages. Since they are considered a risk to lenders, borrowers usually have to make huge down payments, sometimes as high as 50% when taking out raw land loans.
Unimproved land may ring like raw land in your ears, but it is not exactly like the latter. Unimproved lands are a little more developed than raw lands. Sometimes, they may have a few things like a natural gas or electric meter. Like raw land loans, unimproved land loans can be a little difficult to get since they are considered a risky venture by many lenders, just not as risky as raw lands. Also, the borrower may need to have a high credit score and make a down payment of 20% or even more.
Getting an improved land loan is a lot easier than getting raw or unimproved land loans. Because they can be easily sold by the lender should you default in payment, they are considered less risky. So, the interest rates and down payments to be made are lower. Good credit scores may count still. The borrower may still have to make a down payment, only it will be smaller than the other two options. That said, improved lands can be a little too costly to buy, especially relative to raw and improved lands.
How Much Do You Want?
Pros and Cons of Land Loans
Personal loans can be used for pretty much anything isn’t it? We wish we could say the same about land loans. Sadly, we can’t; no matter how hard we tried. Land loans are used for very specific reasons instead. So, they may not be useful for certain categories of borrowers. Where can you find loans useful and where are they a bogus option? What are its pros and cons?
- They are useful for small businesses looking to establish in a new location
- Government-sponsored land loan programs can come with low-interest rates and most times have little to no down payment requirement
- Gives you enough cash to build your dream home
- Land may be inexpensive since it’s undeveloped
- One can use this loan to buy land in a choice area with the potential to increase in value
- Can get land and hold till you are ready to develop
- It may not be so easy to find a lender since not all lenders offer land loans
- Some land loan offers come with short repayment periods certain borrowers may find difficult to work with
- Generally tougher qualifying criteria
Procedure for Getting a Land Loan
Getting a land loan is pretty easy when you are applying for one through a credit union or community bank. It’s even easier when these financial institutions are geographically close to the land you are looking to buy. The process is very much like those of traditional mortgages. So, indicators like your credit score, debt-to-income ratio, and consistency of income may come into play.
However, you may want to consider the following government incentives as an alternative to those obtainable from lenders, community banks, or credit unions.
An SBA 504 loan, for instance, should be the better option if you are getting the land loan for commercial purposes. The repayment term is usually between 10-25 years, relatively longer than many types of land loans.
SBA loans are provided to businesses looking for cash to buy land. They are sponsored and provided to these businesses by the U.S. Small Business Administration. However, the business must operate as a for-profit company, must have a net worth of less than $ 15 million, an average net income of less than $5 million, and must show intent to use a loan to build or improve parking lots, and facilities for commercial purposes.
USDA loans are the right option for individuals looking to develop land in a rural or remote area. USDA loans, sponsored by the U.S. Department of Agriculture were originally designed for low to medium-income families, so, have low-interest rates, and generally need little to no down payment. However, these loans are only approved for people who earn between 50% and 80% of their area’s median income.
What Are the Alternatives to Land Loans
For many, land loans are only attractive in theory; in reality, very limiting. How many borrowers can afford those down payments for instance? Why not obtain a regular loan and develop your land, some say? What other loans are these sets of people referring to? Are there any alternatives worth looking at?
Personal loans are loans obtained from lenders to be used for a variety of purposes. They may be used to get land, develop it, consolidate debt, home remodeling and virtually anything you can think of.
With US Installment Loans partner lenders, you can get as much as $35000 to get raw or unimproved land to develop. Improved land is also a solid option. The best part is that these lenders facilitate quick funding, competitively low-interest rates, and have easy-to-meet eligibility requirements.
A USDA loan as has earlier been highlighted is also a good alternative to explore. There are federal aids one can apply for if the property to be bought is rural. There’s an even greater chance of getting a USDA loan if the land will be used for agricultural purposes. The loan term is usually about 2 years and they are zero-down payment loans.
What do you think about seller financing? Imagine a direct transaction between buyer and seller; zero involvement from any financial institution. That’s what seller financing is about. This way, credit scores, and those difficult down payment requirements are no longer important.
To seal the deal, both parties would usually have to sign a contract detailing all the agreements between them. It’s usually recommended that both parties sign off the deal in the presence of their individual attorneys.
It’s a choice alternative to consider if the seller is eager about selling off the land. Also, since it’s a private transaction, pretty much everything can be negotiated.
Home Equity Loan
Do you have enough equity in your home? If so, have you ever considered a home equity loan? You should probably apply for now. The principle here is simple. You can cover the down payment for land using your home if you can’t outrightly afford the land.
Consider a home equity loan as a mortgage withdrawable in a lump sum but to be repaid in fixed installments over a period. Since the funds are tied to your home as collateral, lenders consider you a lesser lending risk and thus process the loan really quickly. They are easy to qualify for, and the interest rates on these loans are lesser than a few other alternatives.