Wondering “how do land loans work?” If you’re someone seeking an interesting real estate investment for a plot of land, a “land loan” is one type of loan you should consider.
So, what exactly is a land loan? How do they work? Is a land loan the right type of loan for you? We’ll break down and answer all of these questions in this in-depth blog.
What Exactly is a Land Loan?
As opposed to a loan for a property—your typical mortgage loan for a house and home—a land loan is money given to you to purchase land to develop, either for a home or commercial purposes. It’s much less common than a regular home loan. Still, many people do get it with the purpose of building their dream home, expanding a commercial enterprise, or speculating for future developments.
How Do I Get a Land Loan?
Getting a land loan is different—and considerably more complicated—than getting a regular mortgage loan from a bank or a credit union to purchase an existing house. There’s a higher degree of risk for those financial institutions if they’re distributing a land loan since there’s no existing home as collateral for this type of loan. If you’ve gone through the mortgage process for buying a regular home, you should expect something different without home equity – and expect some higher interest rates.
It’s also important to have everything in order for the financial institution before you go to them asking for a loan. Be sure to present them with the plans you have for the new land purchase—everything from future commercial development or building a home to future local and federal government nearby. It’s also important to get the land surveyed so that the lenders (and you) can set the exact parameters of what you’re looking to purchase and see if what you are planning to build will work there.
Once you have everything set, it’s time to look for a lender. That search might take a while—and how much you’ll end up paying usually gets set by the type of land loan you need. Let’s break those down here.
What Type of Land Loan Should I Look For?
One important element of the “how do land loans work” question—what type of loan should you look for? There are several different types of land loans that buyers should look into. The common types are:
- Raw land loans are precisely what they sound like: raw and undeveloped. There’s almost nothing there except for pure, untouched land with nothing you’d expect in developed civilizations. That means there’s no electricity, water, roads, or anything else that people would typically look for when it comes to developing a business or building a home. If you’re looking for a loan for raw land, you are definitely “starting from scratch.” Unsurprisingly—given the underdeveloped nature of this land—it can be tough to get local lenders to hand out a raw land loan to build a house, grow a business, or start construction on anything else.
- Unimproved land loans are one step up from raw land loans. It’s not quite as primitive as raw land, but it’s close. There may be roads and some other utilities, but you’re not going to have every resource you’d want in order to spur development on that type of land. It’s a little easier to get an unimproved land loan instead of a raw land loan, but you should still expect relatively higher interest rates when you look for a mortgage loan to finance the purchase of unimproved land.
- Improved land loans are the easiest loans to get since they do possess the most (and most civilized) amenities. This is the land you’re likely familiar with; it’s the land you live on or do business in. This type of “improved land” comes optimized for work and living, with electricity, sewers, water, roads, and everything else you’re likely familiar with. Again, this type of land loan will be the most expensive to pay for—but will (generally) end up with the lowest interest rates.
Before you look to take out a land loan for land purchase, you need to figure out which type of land you’re interested in. That will drive your choice of lenders, loan terms, and your future payment schedule.
Note that seller financing is also an option for land loans—and a pretty good option, at that. In a seller financing deal, the buyer will pay installments directly to the seller over a stated period (precisely what would happen in a mortgage, for example).
It’s a much more flexible option for both parties and also enables the buyer to avoid going to the banks or other outlets for the lengthy (and often fruitless) loan process. It’s a faster process, with fewer parties involved-always a great idea in real estate.
There are a few different things that people should know about seller-financed transactions, too:
- The buyer will need to display a credit score, just as they would to a mortgage lender. Expect the same sort of thorough check you’d get with a bank or credit union.
- It’s likely to be a shorter-term loan than a mortgage. While mortgages may get spread out over decades in a regular home loan, seller-financed transactions for land generally come in a much shorter repayment term.
- You’ll still have to present the same plans that you would to a financial institution. The seller still needs to see the same sort of planning and development in order to make sure their financial leap of faith is sound.
- Buyers and owners will still need legal representation to complete the sale. Generally, a seller-financed transaction will require the same type of expert real estate agent and attorney representation to finalize all the paperwork.
How ProspectNow Can Help
Now that we’ve tackled the question of “how do land loans work,” let’s outline how ProspectNow can help! Looking for some more information on land loans and the potential benefits for your real estate practice? If you need the analysis that sets you apart from everyone else, it’s time to turn to ProspectNow. In business for over a decade (since 2008), ProspectNow provides the decisive and incisive data that enables real estate brokers to close more deals—and make more money—all for much less than found on other, competing platforms.
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META: How do land loans work? Find out the answer to this question in this in-depth blog from the experts at ProspectNow.