Lands
The Different Types of Real Estate Lot and Land Loans
Are you planning to buy land instead of an already-built property? Going that path is not a bad decision because you can build the structure in it according to your preferences. But, of course, it’s crucial to get a land loan to make your plan a reality.
Taking out a land loan is different from securing a mortgage for a house. Land loans are not easy to come by as home loans. You may also need to put a large down payment for it, and the interest rates could also be higher than a traditional mortgage.
Indeed, you should brace yourself for the challenges of getting a loan for your land purchase. For you to better understand land loans, read this guide below.
Seller Financing
Some individuals and companies sell land and also offer financing options for their buyers. The only catch is that seller financing is different from land loans provided by traditional banks and credit unions. You may not get the right loan for your financial situation because some land sellers only offer limited financing options.
Your loan may come with a higher interest rate and considerable down payment. The repayment term may also be shorter than a regular mortgage. Seller financing is best as a last resort if you fail to obtain another type of land loan.
Land Loans from Credit Unions and Local Banks
While it’s hard to get financing for a land purchase from big national banks, you can try your luck at credit unions and community banks. Look for a lender that works in the area where your prospective property is located. Local lenders surely have a better knowledge of this particular market, and they can evaluate the land value effectively.
The down payment and interest rate of a lender land loan are usually higher. But if you’re planning to build on the land soon, your lender may give you a lower interest rate and down payment offer. There’s also the possibility to take advantage of a longer loan term so you can manage your repayment well.
USDA Rural Housing Land Loans
Some land buyers look for vacant lots where they can build a house in rural areas. If you’re one of these buyers, you can apply for a land loan at the United States Department of Agriculture (USDA).
USDA offers Section 523 loans that are intended for people who plan to buy a rural vacant lot to establish a primary residence in it. For people who want to hire a contractor to construct a house for them, the alternative Section 524 loans are the best financing option.
Families who have low to moderate-income can avail of these USDA loans. The loan term typically lasts up to two years, and such financing has low-interest rates. For example, Section 523 loans only have a 3% interest rate, while the interest rates for Section 524 loans are based on the present market rate.
Home Equity Loans
You can take advantage of your existing house’s large equity and avail of a home equity loan. This loan is better than a land loan because you have your home’s equity as collateral . It means that you don’t need to put a down payment, and the interest rate is more affordable than land loans.
The only drawback of home equity loans is that you may lose your house if you fail to make timely payments. You may not also enjoy tax deductions on the interest you pay for this loan option. Repayment terms of home equity loans can range from 4 to 30 years, depending on the agreement between you and the lender.
SBA 504 Loans
One of the best financing options for people who want to buy land for business purposes is SBA 504 loans. Taking out an SBA 504 loan helps you cover a part of the total expenses of your land purchase.
SBA 504 loans work by distributing the credit among three parties. The United States Small Business Administration can provide you with a loan amounting to 40% of the total cost of buying the land you want, a traditional lender will put in 50%, and the 10% will be your down payment.
This financing option has repayment periods ranging from 10 to 20 years, and interest rates will depend on the current rates in the market.
Things to Consider Before Getting a Land Loan
Before you apply for a loan to finance your land purchase, you should take note of these things below to ensure that you get the right loan for your financial situation.
Check Zoning, Boundaries, and Access
It’s crucial to be clear on the land fundamentals before you apply for a land loan. Go over the boundaries delineated by surveyors, as well as the zoning restrictions. You also have to check if utilities, such as sewer, water, and electricity are accessible. And, don’t forget the public road access.
Before buying land or getting a land loan, it will be smart on your part to check the potential for development in the area. If you’re planning to sell the property in the future, make sure that the land sits in a neighborhood that has the likelihood of becoming a focus of interest by property buyers.
Figure Out How You’ll Use the Land
Lenders will always look at the intended use of the land before approving your land loan application. This assessment by the lender will determine the risks associated with providing you financing for your land purchase.
The planned use of the land will affect the interest rate and the down payment of the loan. If you have plans to construct a home or a business in the land right after buying it, you can secure a land loan with a favorable down payment and interest rate.
If you’re purchasing the land as a speculative investment, the down payment and interest rate could be larger.
Takeaway
Getting a land loan is more challenging than securing a mortgage for an already-built home. In such a case, you have to do your research about the different land loan options, where to obtain the best one for your situation, and what are the considerations that you have to keep in mind before signing the loan contract.
reference:
https://www.investopedia.com/terms/h/homeequityloan.asp