How Do You Get a Land Loan?

Do you plan to buy land that doesn’t have a home on it yet? You may not be able to get a mortgage, even if you have the good intention of building a home on the land ‘someday.’ Mortgage lenders don’t like to take the risk on unimproved land. It doesn’t hold its value and it certainly doesn’t appreciate like a home would.

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So where does that leave you if you want to buy land now and save up to build the home in the near future?

You need a land loan. While it’s similar to a mortgage, it has its differences. Most notably, you’ll probably need a larger down payment and you’ll pay a higher interest rate. You may even have difficulty finding a lender.

Finding a Land Loan

Your first step may want to be to try to find a land loan. You probably won’t find one with your standard mortgage lenders or big banks. Instead, stick to the smaller, local banks and credit unions. They may have more programs that will suit your needs.

You are typically better off sticking with local lenders because they know the land in the area and its potential. If you choose an online lender that doesn’t know the area, they may make it harder to get the loan because of the risk a land loan creates. Because there isn’t a home on the land, the lender doesn’t have anything to hold over your head to get you to make your payments. If you lose the land, it’s not like you are losing your home. You can walk away from the land and take the financial loss.

Once you find a few lenders, you’ll want to compare the offers available as the down payment and interest rate requirements may greatly differ.

Determine a Feasible Down Payment

As we stated above, land loans are risky. Your lender will probably want at least 20% down on the land, if not more. If you have plans already made up for the land, it may help the lender feel better about the transaction. If you don’t have any concrete plans yet, you can expect the lender to request a high down payment closer to 30% or 40% of the land’s cost.

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If you have quotes from several lenders, you can compare the down payment requirements they have. While it’s not a bad idea to make a large down payment and keep your loan payments down, it can take away from the money you have saved to help you build the home on the land.

Compare the Interest Rates

You’ll also want to compare the interest rates. Because of the risk involved, you’ll typically see rather high interest rates on land loans. You’ll want to make sure you are comfortable with the rate offered to you. Make sure you know the full monthly payment and how much interest you will pay over the life of the loan in order to make a proper decision.

Alternatives to Land Loans

Luckily, land loans aren’t the only option when you want to buy land. You can also try one of the following:

  • Home equity loan – If you own a home now, you may be able to tap into its equity and use it to pay for the land. A home equity loan usually has lower interest rates and better terms than any land loan you may find.
  • Personal loan – Depending on the cost of the land, you may be able to secure an unsecured personal loan to get the funds you need. Personal loans are available at your local bank, online lenders, and even peer-to-peer lenders online.
  • Seller financing – The seller of the land may even be willing to finance your land purchase. As long as you can put some money down and you can work out the payment arrangements, this method can work to your benefit. This is often an option when the seller has had a hard time getting the land sold.

Buying land isn’t the easiest transaction, but it can be done. While you won’t be able to secure a standard mortgage unless there is a home on the land, you can find alternatives to help you get the money necessary to buy the land you desire.

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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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