Building a new house is exciting, and half the fun is selecting the perfect plot of land on which to build. Obtaining a land loan and determining your land loan eligibility differs a bit than a typical loan or mortgage, so it’s important to know what to expect when getting a loan for land.
Lenders tend to view land loans cautiously and as a higher risk than with traditional mortgages. The reason is simple: it’s typically easier for a borrower to walk away from an undeveloped piece of land than from a home loan that involves his or her primary residence.
To offset this risk, lenders tend to require a larger down payment and charge a higher interest rate for land loans. As a borrower, having a definitive use for the land and plans to increase its value can help when it comes to determining your land loan eligibility.
However you plan to use the land, be sure to have it professionally surveyed and review the zoning regulations to make certain you’re legally allowed to use the land as you wish.
How you plan to use the land is a major factor in deciding the type of loan you’ll need. Location is key, and If you can show your lender that it’s a prime piece of property versus a plot out in no-man’s land, you’ll have an easier time obtaining financing. Why? The lender will have an easier time re-selling an ideal location should you default on the loan, thereby making it a less risky investment for them.
Another factor lenders consider is the land itself – is it already cleared and does it have access to utilities, sewers and roads? Or is the land “raw,” meaning these man-made improvements have yet to arrive? Raw land is cheaper, but it is much harder to obtain financing and you might find yourself with even higher interest rates and a stricter repayment plan than if you needed a loan for land that was already improved.
The path of least resistance when getting a loan for land is one where you plan to build on the land immediately. You’ll get the most favorable loan terms with approved construction plans in place.
When you begin your research on how to buy land and get a land loan, it’s best to start with your local banks or credit unions. A local lending institution will be more familiar with the area and have a better idea about the land’s value than a national bank with no local presence. Local lenders also have a vested interest in community growth, which makes them more likely to finance a loan.
As with other loans, the bank or credit union will check your credit history before approving a land loan, which can have an impact on loan terms such as the interest rate and down payment. Expect to pay fees associated with the loan that cover a title search and insurance, land survey and appraisal and any attorney fees.
If you already own property and have little debt, obtaining a home equity loan for your land purchase is an option that usually presents lower interest rates and more favorable terms. Federal aid is available if you’re seeking a loan for land in a rural area. The U.S. Department of Agriculture offers direct loans with low interest rates and favorable term requirements for those willing to improve the property.
This article was originally published at Angie’s List.
Ready to start the process for your land loan? We recommend Jason Young of Homestead Funding for all your loan and mortgage needs.