The process of buying land and building a house can be confusing, especially if you’ve never done it before. There are many ways to finance the property and the construction of your home, and your local lender should be able to help you understand what would work best for your particular situation.
Land loans are used to purchase a piece of land or a building lot. You can apply for a land loan if you want to obtain a lot for a new home or business but you’re not ready to start construction right away. On the other hand, if you’ve got plans and a builder ready to go, the land loan is not the best option. Rather, you would ask for a construction loan in this scenario.
There are three common types of land loans:
- Raw land loan-Raw land is land that has no improvements on it at all. There are no roads, no electricity, and no water. It’s undeveloped land. To obtain a raw land loan, it’s likely your lender will want to know details about what you intend to do with the land. It’s also a good idea to put down a large down payment of at least 20% of the total purchase price for the land. Raw land is cheaper to buy than improved land, but a raw land loan will have a higher interest rate and may require a larger down payment than other land loans.
- Unimproved land loan-Unimproved land is similar to raw land but it’s not completely undeveloped like raw land. Unimproved land may have utilities in place but otherwise, it’s just land. Like raw land loans, unimproved land loans require a strong credit rating and a significant down payment.
- Improved land loan-Improved land will have ready access to electricity, roads, and water, but is the most expensive land to purchase. Interest rates and down payments may be more attractive on an improved land loan, so this may help to offset the higher price.
One thing that all three types of land loans have in common is the term of the loan. While it’s very common to have a regular home mortgage with a term of 30 years, land loans are usually capped at 15 years.
How to Obtain a Land Loan
Since land loans are different from traditional mortgages, they can be harder to access, but not impossible. Here are a few ways you might be able to finance your land purchase.
- Banks or credit unions-Not all banks or credit unions offer land loans, but many do. There are also some specialty lenders like farm bureaus that offer land loans, especially in rural areas.
- Government land loans-The Federal Housing Authority and the Veterans Administration both have special programs for purchasing land for new homes. Both agencies will guarantee the loans and the loans will convert to regular mortgage loans when the homes are completed.
- Home equity loans or home equity lines of credit if you own a home with a significant amount of equity, you can borrow against the value of your home to purchase land. The danger with either of these is that you’re pledging your home as security for the land purchase, and you could face foreclosure if you default on the loan.
- USDA loans-The US Department of Agriculture offers land loans to low and moderate income families to allow them to build new homes. For these loans, the land has to be in a designated rural area.
- SBA loans-The Small Business Administration may be able to provide a land loan if you’re going to build a business on the land. You would put down 10% as a down payment, a bank or credit union would finance half of the project and a certified development corporation (CDC) provides the remaining 40%, guaranteed by the SBA.
- Seller financing-If you have problems finding a lending institution to work with, you may be able to obtain seller financing. In this case, the seller would allow you to pay him directly over time.
- Personal loan-This is simply an unsecured loan made to customers with good credit. These loans tend to require higher interest rates and down payments than some of the other options mentioned above, and they’ll likely be shorter term.
Pros and Cons of Land Loans
There are advantages and disadvantages when obtaining a land loan. On the plus side, you can build your dream home and you can build at your own pace. If you’re ready to start building right away, you can have a construction loan that converts to a regular mortgage, which may save you money on closing costs and fees.
On the down side, it may be harder for you to qualify for the loan and you’ll likely have tougher requirements to meet. If the economy takes a downturn, you may find it hard to sell your land if you need the money. Finally, there may be situations where the land isn’t buildable.
If you’re considering the purchase of land for your new home or business, let us help you with that process. For over 20 years, Oklahoma’s premier mortgage company, Financial Concepts Mortgage, has been providing mortgage assistance to the citizens of Oklahoma with some of the best rates in the nation. We do our best to relieve you of the stress surrounding the home-buying or refinancing process. Our goal is to create lasting relationships with each and every client and to continue providing excellent service for years to come. If you’re a first-time home buyer, a previous homeowner, are interested in refinancing, or are looking to consolidate debt, we can help. Our Oklahoma-based team will work with you and your family to ensure that you get a home loan solution tailored to your specific needs.
For more information about our company or the services we offer, visit our website. To speak directly to one of our loan officers, give us a call at (405) 777-4281 or visit us in person at any of our four locations in Enid, Edmond, Midwest City, or Eufaula.