If you’re in the market for some property, you may have come across land loans. But what exactly are they? And more importantly, should you get one?
In this article, we’ll answer all of your questions about land loans and help you decide if one is right for you. So if you’re ready to learn more, keep reading!
But first…
What is a Land Loan?
A land loan (or vacant land loan) is simply a type of home loan that is used to purchase a block of land.
Now, let’s take a closer look at the 5 different factors to consider when getting a land loan, the advantages and disadvantages of getting a land loan, and how to go about obtaining one.
#1. 5 Factors You Need to Consider Before Obtaining a Land Loan
When you’re looking for a land loan, it’s important to consider your needs and how you will use the block of land.
This will help you determine how much money you need to borrow, and what type of loan would be best for you.
It’s also always important to speak to an expert to see what options may be right for you.
Type of Land
The type of land is important to consider in getting a land loan because it affects how much money you need to borrow.
Here are the 3 different types of land for you to consider.
Raw Land
Raw land is exactly what it sounds like – land that has not been developed in any way. There are no buildings, roads, or utilities on the land, which means – it’s generally the cheapest land you can buy.
Unimproved Land
Unimproved land is land that has been developed to some degree but does not have all of the necessary utilities and infrastructure.
This type of land typically has a few buildings or roads, but not all of the amenities that you would find in a fully developed community.
Improved Land
Improved land is land that has been developed and is ready for building. This type of land typically has all of the necessary utilities and infrastructure in place, which means – it’s the most expensive to buy due to its value.
Land Area ( Refer to your Broker)
Typically, most lenders will finance up to 80% of the land’s value. So, if you’re buying land worth $100,000, the lender will likely finance up to $80,000. This means that you would need to come up with the remaining $20,000 on your own.
Now, if you’re looking to finance a larger block of land, you may need to look for a credit provider who is willing to finance more than 80% of the value.
However, it’s important to keep in mind that the greater the amount financed, the higher the interest rate may be.
Location of the Vacant Land
Typically, most lenders will be more willing to finance vacant land that is located in a developed area as opposed to land that is located in a rural area. This is because lenders see developed areas as having less risk.
That being said, there are still some lenders who are willing to finance vacant land located in rural areas.
However, the interest rates on these vacant land loans will likely be higher than for vacant land located in developed areas.
Is it Registered or Not?
Another factor to consider when getting a vacant land loan is whether the land is registered or unregistered because lenders will typically be more willing to finance registered land rather than unregistered land as it is seen as having less risk.
Land Use
Finally, when getting a land loan, most lenders will want to know what your intention is for the land. Are you looking to build a house? A commercial building? An investment property? Something else?
Lenders typically like to finance land that will be used for residential purposes because it is seen as having less risk. However, there are still some lenders who are willing to finance land for other purposes.
#2. Understand the Advantages and Disadvantages of Land Loans
Though getting a land loan to finance your purchased land might be a strategic idea, there are still advantages and disadvantages you have to consider in getting a land loan. Let’s take a look.
Advantages:
- You can purchase land that you otherwise wouldn’t be able to afford.
One of the main advantages of getting a land loan is that you can purchase land that you otherwise wouldn’t be able to afford. This is because vacant land loans allow you to borrow a larger sum of money than what you would be able to get with a personal loan or credit card.
- You can use the land itself as collateral for the loan if you don’t have any.
When you get a land loan, the block of the land itself can be used as collateral for the loan. This is a great advantage because it means that you don’t have to put up any other collateral, such as your house or car.
Disadvantages:
- Vacant land loans can be difficult to qualify for because they are seen as high-risk investments by lenders.
This means that you need to have good credit and a strong financial history in order to qualify. Additionally, you’ll need to make a larger down payment than you would for a traditional loan.
Thus, finding it difficult to get a vacant land loan.
- The interest rates on vacant land loans are typically higher than the interest rates on other types of loans.
The interest rates on vacant land loans are typically higher than the interest rates on other types of loans because they are seen as a higher-risk investment by lenders. This means that you’ll end up paying more in interest over the life of the loan.
Additionally, vacant land loans often have shorter repayment terms than other loans. This means that you’ll have to make your payments more frequently, which can be a burden if you’re on a tight budget.
- You may be required to make a larger down payment on a land loan than you would for other types of loans.
Vacant land loans can be difficult to come by. Traditional mortgage loans are much more common, which means there are fewer options for those looking to finance a vacant land purchase.
With less competition between lenders, borrowers could face a bigger down payment requirement, a higher interest rate, and less time to repay the loan than they would with a traditional mortgage.
We recommend speaking to an expert for further information on applying for a land loan, what your interest rate may be and your required down payment.
#3. How to Obtain a Vacant Land Loan
Obtaining a land loan is not as difficult as one might think. There are a number of financial institutions that offer loans specifically for the purchase of land.
– Research different lenders to find one that offers a vacant land loan.
– Shop around for the best interest rate and terms.
– Make sure you have a good credit score and history.
– Gather all of the necessary documentation, such as proof of income and asset statements.
– Submit your loan application and wait for the approval.
Once you’ve found the perfect lender for you, it’s time to start looking around for the best deal. Interest rates and terms can vary significantly from one lender to another, so it’s important to compare your options before making a decision.
So, should you get a land loan?
It depends on your specific situation, we always recommend getting some professional advice to help you decide what’s right for you.
Our team of experts is here to help! We provide a free consultation to help you find the right type of loan for you so that you can make an informed decision about what’s best for you.
Contact us today to get started!