Keep in mind, that lenders consider land loans to carry a higher risk, particularly if you have no immediate plans to build on your lot, and as such they may be subject to the following restrictions: That being said, when borrowing money from a local bank or credit union you should be prepared to overcome some challenges, and you may have to shop around until you find a lender willing to give you a loan with satisfactory terms and interest rates. Local lenders also have a vested interest in the growth and sustainability of the community itself, and as such may be more likely to underwrite a land loan than a national lender with little or no regional presence. Local is key here, because as part of the community the lending institution will have a better idea of the value of the land you are planning to purchase. If you are shopping for a land loan, the first place to start is with a local bank or credit union. Moreover, you may qualify for a construction-to-permanent loan covering both the purchase of the land and the building project. If you are planning to build on the land immediately, and you have construction plans in place, you are more likely to be approved by a lender. Do you have plans in place to further improve the land, bringing it up to local codes and preparing it for construction? Are you planning to build on the land immediately, or will you be holding onto the parcel as an investment property? These are important points to consider, because they can greatly impact your ability to get a loan written at favorable terms. If you do find a lender willing to work with you on your purchase of a raw parcel, you may find that your loan will fall under the umbrella of commercial lending, in which case you should expect higher interest rates and more restrictive repayment terms.įinally, lenders are also interested in how you're going to utilize the land itself.
Buying raw land can be significantly cheaper than buying already improved land, but it will be harder to find a lender willing to finance your purchase. That's because it lacks any man-made improvements (clearing, roads, sewer, water), and it will take a major influx of time and money to increase the land's market value. For example, raw land is deemed a far greater risk, and is much more difficult to finance.
Should you default on the loan, they will have an easier time disposing of the collateral and offsetting any potential losses.Īnother key consideration for lenders is the nature of the land you will be buying. Location is key, and lenders are much more likely to underwrite a loan for a prime piece of desirable real estate than for a plot of land in the outskirts of nowhere. While any parcel of land has some intrinsic value as a real asset, you are much more likely to be approved for a loan if you can show that it also has value as an investment. The most important of these is the land itself, its location, and how it will be used. There are a number of variables that can influence your financing options when buying a piece of land. Banks also tend to charge a higher rate of interest to offset the additional risk. Consequently, land loans can be more difficult to obtain, particularly if you don't have a definite plan in place to improve the property and increase its value. People are much more likely to walk away from a land loan than a mortgage, potentially leaving the lender with an unimproved parcel of land which they will have to sell to recoup their losses. Undeveloped land, on the other hand, doesn't deliver the same degree of investment security for the creditor. Moreover, a house on a lot has greater value on the open market, and makes for a more secure form of collateral. Borrowers are much less likely to walk away from a home loan, particularly if the property is being used as a primary residence. But a short primer should help you understand how land loans work, and what your options are when looking for a lender.īanks and other lenders tend to view land loans with a wary eye, and consider them to be more of a risk than a standard mortgage. If you've never purchased land before, you may find the process a bit more challenging than you expected. Land loans are unique financial products, and they are handled differently than mortgages and other secured loans. But borrowing money to purchase raw land is not quite that straight forward. Unless you're in a position to pay cash up front, you'll need to borrow some money to finance the purchase. Everything You Need to Know About Land Loansīuying a parcel of land, either as a long term investment or on which to build a new home, is not quite as simple as you might think.
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