Home Buying

How to Get a Land Loan

While most people purchase homes that are already built, some people want to get a bit more creative. Therefore, they purchase land to get things going, so that they can build their own dream homes.

While you get creative control when you decide to build, you still can’t avoid the fact that there is a large amount of capital required to get through the process.

Not only does the land need to be prepared to accommodate your new home, but you also need to buy all the materials needed, plus you need to pay the contractors who are working to make your home a reality.

Moreover, you never know what kind of random expenses can come up in the middle of the building process that you may need to attend to. When you add it all up, you likely just don’t have the kind of capital that is required. However, it is possible to acquire this capital.

Land Loans

Acquiring a land loan is one of the steps you can take to get started on your dream home. While these loans don’t cover the total cost of building the home, they cover the amount that you need to buy the land that you start building on.

Now, you may think that such a loan is useless, since it just results in you ending up with a plot of land. When you acquire that land, you still need to build stuff on it, right? Well, you also need to remember that the cost of the land is miniscule compared to the figure that is needed to start building.

This means that you can always secure the land in the meantime, while you work on assembling the funds you need to start building. It is also very possible to complete payment of the land loan before you start the construction process, so you can always free yourself up to start another loan payment.

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How Lenders Feel About Providing Land Loans

Most lenders view the provision of land loans as riskier than the provision of home loans. There isn’t a home to use as collateral, and the repossession of the land may not yield the required value if the person should default on payment.

Additionally, it is proven that people are more likely to walk away from land in the event of hardship than they are to walk away from a house. That is understandable when you think about it.

Even if the bank were to try to sell the land to reclaim the value of the loan, this might prove to be a difficult process. If you were to look at the market share for land, you would see that it’s not very impressive. The truth is that the demand for land is not even close to the demand for homes. This is because not everyone has the drive or even the desire to purchase land to build something on.

All these factors are considered by lenders when they are required to provide land loans, so the terms that usually come with them can be a bit crazy.

The down payment is an example of this. As you know, when you buy a home, you must make a down payment and the loan covers the rest. The payment percentage is way more with a land loan than it is with a home loan. Additionally, there are usually higher interest rates coupled with shorter repayment terms for these kinds of loans. You may not even be able to get a ten year repayment term when you opt for a land loan.

How to Go About Getting a Land Loan

There are several different types of land loans, and these are all covered below. It is important to note that each type has its own inner workings and required qualifications. However, there are some general rules that apply where the acquisition of one of these land loans is concerned.

You first need to prove that you earn an income. Bank statements, pay stubs, job letters, etc. are great ways for you to display this. The point is that the income needs to allow for coverage of the loan repayment figure without being a strain on you. A lender needs to see this, or the belief is that you cannot adequately handle the repayment.

Your debt-to-income ratio also factors into the equation above, and you need to show that you have a good one. If debt is already eating away at most of your income, then it simply means that you cannot handle another source of credit.

Finally, excellent credit is required to access these types of loans. After all, this is the indicator that shows what your behavior is when you get to access credit facilities. A credit score check is typically done in this regard, and it forms a part of the processing fee for your loan.

The Types of Land Loans That You Can Access

There are five major types of land loans that you can get from lending institutions. Each one has different requirements and a different purpose that it serves.

Seller Financing

This loan doesn’t come from a financial institution, and it is not always available, depending on the land that you are looking to buy. This is because it is offered by the party selling the property to you. Note that this financing is usually offered with a short-term repayment condition.

While you may be able to access such an option, you should note that the terms here can be a bit extreme. Apart from the term for repayment, the down payment can be very high and so can the interest rates.

After all, this is just a random individual or company that is selling the land to you, so there are no resources or portfolios like that of a bank.

Home Equity Loan

This is an option that you’d need to have an existing home to cover. That home needs to have a significant amount of equity. If it does, you can use it to your advantage to get a home equity loan.

Unlike the situation you encounter with other loans, there is no down payment required, since you already own the asset. Additionally, the interest rate that you are given is typically not too high. Since your home is being used as security, there is no concern for what you plan to do with your land.

Should you decide to opt for this option, you should note that the interest you pay does not fall under the realm of being tax-deductible. This is because the loan’s purpose is not for the benefit of the house it was taken out against. Additionally, if you default on your payment, the possibility exists that you may end up losing your home.

Lender Land Loans

It is heavily recommended that you weigh your options before you make a loan application here. This is something you should do, regardless of the loan type, but especially for lender land loans.

The first point to note is that the interest rates can be very high when you opt for such land loans. If you are not looking to develop the land that the loan is for, this interest rate could skyrocket even higher.

Additionally, the down payment required could be heftier than you’re ready to accommodate. There are some cases where it’s required that you have 50% of the value of the land upfront before your loan can even be processed.

Of course, much of this depends on your plans for the land. So if the idea is for you to start development in the short term, then the conditions are likely to become more favorable.

Larger banks are not famous for offering lender land loans, so you may need to go to a credit union or a community bank.

SBA 504 Loans

This loan only applies to you if you’re a business owner. Additionally, you must be using the land for the benefit of your business. If you meet these two conditions, then you may qualify for an SBA 504 loan.

These loans are typically accessible via the United States Small Business Association, which is affectionately called the SBA. When you opt for this kind of loan, there are three contributors to the loan.

The first is the SBA, which provides a loan that covers 40% of the purchase price. The second is lender, which covers 50% of the purchase price with a loan. You are required to cover the additional 10% that is required by making your down payment.

The interest rate tends to be based on market rates when you get the loan, and the repayment period is either 10 or 20 years.

Rural Housing Site Loans

These land loans apply to you if the plan is to construct your home on land purchased in a rural area. Note that this must be a place of primary residence. If these conditions are met, then the United States Department of Agriculture can assist you with one of two loan types.

The first is the Section 523 loan. These are exclusively offered to those who plan to complete the labor process themselves. The interest rate on these loans is usually no more than 3% per annum.

The second loan type is the Section 524 loan. These loans are offered to those who plan to hire a contractor to complete the building of the home. The interest rate provided here depends on the current market rate.

Regardless of which one applies to your situation, they are designed for families that have a low or moderate amount of income.  The repayment term is two years, and you may even be able to access the loan with no down payment depending on your situation.

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