Land Loans: 3 Things to Know Before You Buy Land

If you choose to buy land rather than an existing house because you want to build from the ground up, you will most likely be required to take out a land loan. This makes it far more difficult to secure a conventional mortgage. To begin, there is no home that can be used as collateral for the land loan, and it is quite unlikely that you would be able to purchase land with no initial investment on your part.

Prospective land buyers face an additional set of obstacles when trying to get financing for their purchases. Before you go out and buy some land, here are three things you should consider.

Key Takeaways

• The most effective methods to finance the purchase of land are to get financing from the seller, through local lenders, or via a home equity loan. If you are looking to buy a home in a rural area, you should investigate whether or not you are eligible for a loan that is subsidized by the USDA.
• The most effective methods to finance the purchase of land are to get financing from the seller, through local lenders, or via a home equity loan. If you are looking to buy a home in a rural area, you should investigate whether or not you are eligible for a loan that is subsidized by the USDA.
• The most effective methods to finance the purchase of land are to get financing from the seller, through local lenders, or via a home equity loan. If you are looking to buy a home in a rural area, you should investigate whether or not you are eligible for a loan that is subsidized by the USDA.
• The most effective methods to finance the purchase of land are to get financing from the seller, through local lenders, or via a home equity loan. If you are looking to buy a home in a rural area, you should investigate whether or not you are eligible for a loan that is subsidized by the USDA.
• The most effective methods to finance the purchase of land are to get financing from the seller, through local lenders, or via a home equity loan. If you are looking to buy a home in a rural area, you should investigate whether or not you are eligible for a loan that is subsidized by the USDA.

Land Fundamentals

There are several different challenges that arise right from the bat when dealing with property, especially raw portions that are not clearly demarcated. Investigate the following concerns and adjust your plans as necessary to ensure that you will be able to utilize the property in the manner that you want.

Boundaries

To begin, it is very necessary to get an understanding of the nature of the aforementioned transaction’s scope. For this reason, it is very necessary to have surveyors sketch the boundaries and to have everything written down and ready to provide to the lender. Confirming the zoning and land-use restrictions is an additional essential part of the process.

Zoning

Find out what the future holds for the surrounding region by contacting the planning department in your community. It is more likely that the construction of a new park down the street will cause real estate values to rise in the coming years than the construction of a new highway or sewage treatment plant.

Access

For residential locations, accessibility to the necessary utilities is a crucial factor to take into account. A lot of time, money, and hassle may be saved by having ready-to-go hook-ups for water, sewage, electricity, and cable. In a similar vein, access to public roads may be essential, considering that the buyer will be required to acquire a permanent easement to access a public road in the event that one does not already exist on the property.

Because buying land is not the same as buying a home, it is in your best interest to work with a real estate agent that specializes in construction finance or the kind of transaction that you are looking to complete.

Planned Use of Land

Lenders often avoid taking risks, and acquiring land with the intention of developing it may be a risky business venture. However, the risk associated with your loan will be evaluated differently by the lender depending on how you want to employ your property and at what point in time development will take place.

Build Immediately

Because the expected use of the property is closely tied to the bank’s risk exposure, the loan terms, such as the down payment and the interest rate, are often dependent on the anticipated use of the property. Getting a loan for raw land is often far more difficult than getting a loan for the purchase of an existing home. This is because an existing home offers the financial institution immediate, tangible security. The creation of a building right once, as opposed to the development of the site at a later date, often involves less risk due to the fact that there are a number of reasons that may prevent expansion in the future.

The Federal Deposit Insurance Corporation (FDIC) has established laws for lending to banks that address maximum loan-to-value ratios for lands. However, loan conditions should not go beyond what is required by the FDIC and are subject to the internal limits of each lending institution. The minimum down payment required for a one-to-four family house is 15% (or the maximum loan-to-value ratio is 85%). 2

Improvements Needed

There is a possibility that some land is not yet suitable for development. It’s possible that this was known at the time of purchase, but it’s also possible that it wasn’t discovered until after the purchase was made. In either case, there is a bigger risk associated with the land, given that increased ambiguity may result in price hikes or extra problems when developing an asset. This risk is greater since greater uncertainty may cause price increases. The highest loan-to-value percentage that the FDIC will allow for land development is 75%, while a deposit of up to 25% is often needed. 2

Speculative Investment

Last but not least, there is undeveloped land that has no definite plans for future development; this kind of investment is fundamentally speculative in nature. A project along these lines would, for instance, include the purchase of land in order to lay the groundwork for the construction of a new highway in the surrounding area. After the completion of the highway, it is anticipated that the region will be desirable to developers who are eager to construct a new community that is conveniently located close to the city. If all goes according to plan, the developer should make a tidy profit on the sale of the property. In spite of the fact that the FDIC has set the maximum loan-to-value ratio at 65%, lenders can feel compelled to ask for down payments of greater than 35%. 2

Lots are considered unimproved if they do not yet have the necessary utilities installed on them. It is not uncommon for there to be unforeseen challenges and cost overruns, both of which may add additional time to the acquisition plan.

Land Loan Options

Because of the problems I’ve outlined above, it’s possible that you’ll need to dig deeper to find appropriate financing for the purchase of property, but there are many possibilities available to you.

Seller Financing

If the market is quiet and the seller is ready to sell, this may be a clever method to negotiate favourable circumstances. This is especially true if the seller is eager to sell. Everything is up for negotiation since this is a private agreement between two different people; this includes the down payment as well as the interest rate. Before signing anything, it is very necessary to have the papers reviewed by an attorney in order to reduce the risk of unpleasant surprises and loopholes occurring for either party.

Local Banks and Credit Unions

The likelihood of a land loan being approved by a local bank or credit union is higher than the likelihood of approval by a national bank. Because of their familiarity with the neighborhood and the property, they may also be able to provide more favorable terms. A potential borrower is required to provide a loan package that demonstrates their ability to repay the loan, which should include land specs and drawings, as well as information on their personal finances.

Land Loans Pros vs. Cons

Pros

• Land loans might be beneficial to small businesses that already own land.

• For instance, buyers of land may qualify for USDA loans, which provide low interest rates and require a small or even nonexistent down payment.

• It is possible that purchasing a property that is already prepared for construction will be less expensive in certain regions than purchasing a new home.

Cons

• Not all lenders offer land loans.

• You are required to get a survey as well as an understanding of the zoning limits before submitting an application to a loan officer for a land loan.

• Some land loans have shorter repayment periods.

• If you utilize your primary residence as equity on a land loan and the loan goes into default, you run the risk of losing your home.

USDA Loan

How can people buy land if financial institutions like banks and credit unions won’t support the transaction? The buyer may be entitled for help from the government if the property in question is rural and suitable for agricultural use. The United States Department of Agriculture (USDA) offers a number of different subsidized loans with minimal eligibility requirements and conditions that are to the borrower’s advantage. 1

Home Equity Loan

A home equity loan might be of interest to a prospective buyer who currently has property and has a manageable amount of other financial obligations. This loan takes use of the equity in the existing property in order to provide conditions that are far more favorable than those offered by typical construction or land loans. 3

Is It Difficult to Get a Land Loan?

Due to the fact that acquiring land is not quite as straightforward as purchasing a home, getting a land loan is more difficult than obtaining a conventional mortgage. As a result of the fact that many financial institutions like banks and credit unions do not easily give land loans, you need to be very certain about the piece of real estate that you want to acquire and be ready to present surveys and zoning information on the site you want to build on.

Is Owning Land a Good Investment?

Owning land might be a lucrative investment opportunity for you, depending on the kind of land you purchase, where that land is located, and what you want to do with it. The degree of risk involved in acquiring a parcel of ready-to-build property, such as a primary or secondary home, is distinct from the level of risk involved in purchasing undeveloped land for agricultural purposes.

What Is the First Step to Applying for a Land Loan?

When asking for a land loan, the first step you could do is to locate the most suitable lender for your acquisition. Although there are various lenders out there, not all of them provide loans for purchasing land. A local credit union is an option worth considering if you want to become involved in the process of land development in your community. You will be required to collect all of the relevant documentation, such as a land survey and details of how you want to put the property to use.

The Bottom Line

The process of securing financing for the parcel of land on which you want to build your dream home is far more challenging than being approved for a mortgage. Lenders often want surveyed boundaries, and you’ll also need to look into zoning and land-use restrictions, as well as explore your property’s access to utilities and public highways. The higher the quality of the land, the lower the required down payment and the overall cost of the loan.

The most effective methods to finance the purchase of land are to get financing from the seller, through local lenders, or via a home equity loan. If you are looking to buy a home in a rural area, you should investigate whether or not you are eligible for a loan that is subsidized by the USDA.

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