A loan for land is used to buy raw land, recreational land, vacant lots, and agricultural property. These loans are different from traditional property loans since lenders consider the collateral as a lot less secure, making the loans riskier. Typically, lenders will ask for higher down payments of as much as 30% or more. They will also charge higher interest rates or fees than traditional mortgages. Let's now look at the options.
Getting a Loan for Raw Land
6 Specific Options for Land Loans
USDA Rural Housing Site Loans – This is best for families with low to moderate income that want to build their primary house on a rural lot.
Local Financial Institution Land Loans – It is great for local buyers interested to buy a building lot, recreational land, or farmland.
Seller Financing – This is for buyers who cannot qualify for a more traditional loan for land or for cheaper parcels of land through sites like LandZero.com
SBA 504 Land Loan – This is great for business owners who plan to buy a land for their commercial enterprise.
Home Equity Loans – This suits buyers who already have equity in their personal homes and wish to use this to buy land.
Land Company Loans – It is a good option for buyers who purchase through land brokers for mid range priced land and prefer to use built-in financing.
Understanding the Mechanics of Land Loans
Typically, a loan for raw land is utilized for financing undeveloped or partially developed properties, such as agricultural acreage, energy-producing land, recreational land, vacant building lots, and commercial parcels. It is not intended for the purchase of existing properties. Some land loans are obtained with the intention of building on the property, while others are acquired for productive use, investment, or recreational purposes. Different types of land loans cater to various types of borrowers, usually requiring collateral, which often cannot be the land itself. It's actually quite rare to get a land loan unless you're rich, a big farmer, or have a substantial use case the bank likes.
Title Insurance - A Requirement for Land Loans
With land, especially cheap land, you don't always need title insurance. But when getting a loan from a bank for $100k or so, it's required by banks. Seller financing land, even on sites with land under $10k, is usually not sold with title insurance to keep costs low. But stay away from things like quitclaim deeds. You can get title insurance down the line if you wish to build a home. If you're looking at buying land above around $30k, you will most likely close with escrow and an agent, so it will be done anyway.
Benefits of Obtaining a Loan: Is it Worth It?
Getting a loan to buy land or build on your existing land is a decision that requires careful consideration. You need to determine if it is worth it. The last thing you want is to be upside-down on your land, meaning you got a loan for land purchase at $100k, and that land can only sell for about $40k. Even if you do sell it, you still owe the rest on the outstanding amount on the loan. When building a home, you should conduct some market checks. Can you sell this home for more than the land and home built? Can you rent it out if that is your goal, and will it cover the payments on the loan at least? These are important things to consider, or you will kind of screw yourself, unless the plan is just to live out life in it because it is your dream home.
Buying Without a Loan
While this of course is always best so you can stay away from large interest rates. It is not always an option unless you have the cash upfront. This is where owner financing comes in, and websites like LandZero.com Shop around if you are going to get owner financing as well. Don't just pick one quote and go with it. If you can use equity, then you could pull out money often and keep a lower rate rather then a large land loan rate. Also don't discount buying some cheap land and alternative housing options. Land that goes under $10k and building it yourself with a small amount of help, can put you living mortgage and loan free.
Understanding the Evaluation Process of Land Loans by Lenders
When it comes to lenders, providing a loan for land poses a higher risk as the property itself may not yield any income or provide shelter. This makes it more probable for the borrower to default on the loan. To mitigate these risks, lenders may require a larger down payment, impose higher interest rates and fees, and expect a quicker repayment of the loan. Therefore, it is important to be prepared for these conditions.
In essence, it is crucial to conduct thorough research. Verify the value of the land, especially if it is expensive. Consider potential challenges such as job loss or financial difficulties. Assess whether you can still manage loan payments alongside your regular expenses. Furthermore, in case of an emergency requiring you to sell the land, ensure that you can at least recover some funds beyond the loan amount. Prior to making any commitments, it is essential to carefully weigh these factors before diving in.
