Table of Contents
- What Exactly Is A Land Loan?
- Loan for Raw Land?
- Loan for Unimproved Land
- Loan for Better Land
- What Is the Process of Obtaining a Land Loan?
- The Benefits and Drawbacks of Land Loans
When potential home buyers are looking to buy a home, it is usual for them to explore building a home. However, the idea of creating a home may appear ideal until future homeowners learn how much it may cost to build a house. Though building a house can be costly, there are numerous ways to make it more affordable for first-time homebuyers. One of these resources is land loans. If you want to build a house, you will almost certainly need to apply for a land loan. While Rocket Mortgage® does not provide land loans, we recognize the value of educating our consumers.
What Exactly Is A Land Loan?
A land loan is a type of loan used to fund the acquisition of a plot of land. They are used when a buyer wants to purchase a land plot to build a home or do business. If you’re going to get a land loan, the type you get will depend on where you want to acquire land and how you plan to utilize it.
The three most common land loans are raw land loans, unimproved land loans, and improved land loans.
Loan for Raw Land
Raw land is defined as entirely undeveloped land with no power, sewerage, or roads. If this is the type of land you want, you must apply for a raw land loan. Because funding for undeveloped land might be difficult to obtain, you must prepare a firm, thorough strategy for how you want to develop the site. This will demonstrate to lenders that you are devoted to the project and do not constitute a significant risk. If you have a substantial down payment and good credit, you can also improve your chances of qualifying. While raw land can be less expensive than developed land, raw land loans have higher interest rates and require larger down payments than other land loans.
Loan for Unimproved Land
Unimproved land is similar to raw terrain. However, it is more developed. Unimproved land may have certain utilities and facilities, but it usually does not have an electric meter, phone box, or natural gas meter. Although an unimproved land loan is less dangerous than a raw land loan, it can still be tough to secure, so make sure you have a thorough plan, a significant down payment, and a great credit score. Because unimproved land loans aren’t the riskiest sort of loan, down costs and interest rates aren’t as high, but they are more prevalent than for other types of loan financing.
Loan for Better Land
As opposed to raw land and unimproved land, improved land has access to roads, power, and water. Because improved land is the most developed, it may be more expensive to purchase. Interest rates and down payments for an upgraded land loan, on the other hand, are cheaper than for a raw land loan or an unimproved land loan. Nonetheless, a substantial down payment and a strong credit score are still required.
Land loans are obtained in the same way that a buyer would get a mortgage loan, but unlike receiving a cash amount linked to the property, determining the value of the land can be more difficult due to the lack of property collateral. Therefore, land loans area riskier transactions for lenders, resulting in more outstanding down payments and interest rates than a standard home loan.
What Is the Process of Obtaining a Land Loan?
Because there are various sorts of land loans, each has its own set of requirements that borrowers must follow. However, some common standards are followed when a borrower applies for a land loan. A borrower will need to demonstrate that they have a great credit score, as with any loan. They will also be required to describe their intended use of the land, which may vary depending on the loan they seek. Borrowers must also identify characteristics of the property that must be investigated, such as zoning, land-use limitations, surveyed boundaries, and utility access. These indicators will help lenders determine how hazardous the loan is.
After a lender considers these variables, they can issue the rates and obligations of the land loan. Because they are more hazardous, land loan interest rates are often higher than mortgage interest rates. However, if a borrower has a higher credit score and a lower debt-to-income ratio, they may qualify for lower interest rates. After the loan’s interest rate is calculated and the borrower has been accepted by a lender and agreed to the loan’s terms, the borrower is responsible for making a down payment and repaying the loan at the agreed-upon interest rate.
The Benefits and Drawbacks of Land Loans
If you’ve contemplated asking for a land loan, you’ve probably recognized that there are certain advantages and disadvantages. Let’s go over some of these pros and negatives and
see how they apply to your unique needs and financial position to help you make a decision.
Pros
If you want to build a house or a business, there are numerous advantages to applying for a land loan. By far, the most significant benefit is the ability to design and build the home of your dreams. If you intend to use the land for commercial purposes, it might also provide enterprises with the potential to capitalize on emerging areas. Using a land loan to build a home or business is a good choice if you have a vision and are creative and patient.
Cons
It is critical to comprehend the benefits and cons of applying for a property loan. Because it is a riskier transaction, there is a lack of collateral, making specific lenders less eager to lend to borrowers. There is also the possibility of a more significant down payment and higher interest rates when financing. Because it is a new construction project, there is a chance of unforeseen problems and other issues.
How to Refinance Land
The reason you desire to refinance your land will influence how you approach the situation. Suppose you wish to refinance to receive money to enhance the property, such as adding utilities or other upgrades before developing it. In that case, you will approach it as an improvement loan to add value if the land value has increased. However, you only want to take money out to pay other debts. You will need to take a different method to request your loan. If all you want to do is cut your payments, you’ll need to go elsewhere. However, the procedures of refinancing are comparable.
1st Step
Explain to your present lender why you wish to refinance. Check that your payments are current and have a recent appraisal of the property to indicate its current value. Use a tax assessor’s appraisal or have one done by a professional appraiser to determine the value when applying for a loan. Keep a note of any improvements or other changes to the land that have occurred since your initial loan.
2nd Step
Demonstrate development plans if that is your goal, or obtain recent sales of the property in the region to demonstrate how value has increased if you want to take money out. If you want to reduce monthly payments, have a firm plan for lengthening the loan period value and explain why.
3rd Step
Check with different lenders to compare interest rates and other factors. Look for lenders who specialize in land loans, especially if the property is a farm or undeveloped land. Use a mortgage broker that has access to a large number of lenders and may be able to obtain a better price on refinancing. Give the broker all of the specifics about your present loan, any renovations you’ve made or are planning, and any other supporting documentation.
4th Step
Get the actual payout amount on your current loan, including any early payment penalties. Explain to potential lenders why you require more than the payback for a new loan. Investigate any savings for title searches, recent surveys, or other loan preparations to evaluate whether to stay with your present lender or switch; refinancing with your current lender may save you money.