What to Know About a Land Loan For Home and Business
Land Loan Financing Explained
A land loan is used to purchase a plot of land. You may want to buy land to build your dream home or start a business. If you are looking at getting a land loan, a lot will depend on what you plan to use the land for.
There are three types of land loans offered for financing land: raw land loans, unimproved land loans, and improved land loans. We will take a look at how they work. The different types of loans have different lending criteria. However, there are some commonalities.
The borrower will need to prove they have a good credit score. They will also need to explain the intended use of the land when purchased. Zoning and any restrictions on the use of the land will need to be taken into account.
Another consideration is if utilities are available, are there any creeks or waterways, or water holes. If you are considering having some animals grazing, all this will be very important. As with most loans, there are benefits and drawbacks to a land loan.
If you are not planning on building a home immediately, most people will opt for a land loan. On the other hand, if you will buy a piece of land and build right away, you would be better off financing your project with a construction loan. With a home construction loan, you can finance the land's acquisition costs combined with the costs of building a home.
Pros of Land Loans
- You can build your own home.
- Capitalize on rising Real Estate prices.
- The loan will give you time to build a business.
Cons of Land Loans
- Unless you have a large deposit, lenders may not lend to you.
- The lenders will be looking for collateral ( if you have sold another house, you should be OK). This is because rural start-ups are extremely expensive, and to start a business on the land, whatever it is, you are going to need some money behind you.
- You need to have a 'rainy day' fund for unforeseen circumstances.
How to Get a Land Loan
Two are the most popular places to get land loans are from local banks and credit unions. Larger financial institutions are less likely to grant land loans. If you live in a rural area, a USDA loan is a good option, especially if you do not have a large down payment.
You will need to have at least a 20-30 percent down payment in most land purchases. This is not the case with a USDA loan. Much like getting a USDA loan with a house, you don't need a down payment as long as you qualify.
The typical repayment time frame will be two years. There are a few other land loan options you may want to consider below. Like buying a home, you will want to be financially prepared before meeting with a lender.
Home Equity Loan
If you want to buy a piece of land and forgo getting a loan conventional land loan financing, you might want to consider a home equity loan. If you have plenty of equity in your place, you can use that as additional collateral to purchase a lot. This type of loan will allow you to lock in a lower interest rate. The home loan repayment term can vary and could last up to 30 years.
Another arrangement you could make if the seller is interested is to have them hold the mortgage. This option could certainly be a win-win for the owner if they don't need their cash in a hurry.
The owner obviously knows the property, and if you default, they will not have lost anything but time. The seller may make a legal agreement to lend you the money and handle the mortgage. The seller would be flexible as he knows the value is in the land.
Types of Land Loans
Raw Land Loan
A raw land loan involves undeveloped rural land with no services, like roads. If you consider applying for this type of loan, you will need to write a detailed business plan of how you intend to make it financially productive, showing lenders that you have committed for this rural project to work.
The raw land will be cheaper but will have high-interest rates because it is risky.
Unimproved Land Loan
Similar to raw land, but slightly more developed. The property may have a land survey done and have utilities already on the lot or nearby. Therefore it is not quite as risky as a raw land loan. This type of loan could also be difficult to obtain, but the down payment may be achievable, the interest rates will still be high.
Improved Land Loan
Improved Land means that your prospective land has access to roads and amenities. This will make it expensive, but it may well be worth the expense as much hard work is done.
To start with, your down payment and interest rates will be much lower than for the raw and unimproved land. Check your credit score and make sure you have a deposit of 20% or near before you make your loan application. Applying for a land loan is a similar process to applying for a normal home loan but attracts higher interest rates.
Things to Consider Before Applying For a Land Loan
- How near to town are you? Are schools, hospitals, shops, restaurants, and neighbors nearby? Can you be happy in a remote area?
- What will you live in while you are building a home for your family?
- Will you live there alone until the home is built and move your family in later?
- Do you have a rugged terrain vehicle to move around your land?
- Are there any wild animals, like bears?
- Do you have electricity, or do you need a generator?
- Can you set up a TV or WiFi reception so that you can skype the family?
- Does the area have mobile Phone reception?
- Add up your needs carefully, as the start-up costs for raw land could be considerable depending on your needs.
Land Financing For Business Purposes
When financing your land, you need to have an obvious vision of your future and future needs. Something a lot of people never consider is that you are often at the mercy of the weather. For example, if you are growing a crop and don't get the usual amount of rain, the crop can fail.
It is often wise to build in irrigation for watering, which can be very expensive, but the alternative is even more frightening. Many people love the idea of moving to a rural area, and some advisors recommend that before you take this step, you should have a 30% deposit, as this will give you greater equity for when something goes wrong.
If you are on raw land, you will even have to build your own road or track in, requiring the use of some machinery to construct and maintain. So the ideal is probably to look for improved land to give yourself a good start.
Conclusion on Buying Land and Getting a Loan
The other factor to consider in this type of project is your age. You actually need to be young and energetic to carry out the requisite work on your land. Often a lot of hard manual labor is required.
Starting again as a rural landowner is definitely for the younger person. Hopefully, you have found this information on financing land via a land loan to be useful.
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