If you are looking for a loan to buy land, you may find it challenging to get financing from traditional lenders. Land loans are different from mortgages because they involve higher risks, lower demand and fewer options. However, there are some ways to find the best loan for your land purchase, depending on your situation and goals. Here are some tips to help you compare loans and choose the one that suits your needs.
Types of land loans
Before you start shopping for a loan, you need to know what type of land you want to buy and how you plan to use it. There are three main types of land loans, each with its own advantages and disadvantages:
Raw land loan. This is a loan for a piece of land that has no improvements, utilities or access roads. It is usually the cheapest type of land, but also the hardest to finance. Lenders may require a high down payment (up to 50%), a high interest rate and a short repayment term. You also need to have a clear plan for developing the land and getting it appraised.
Unimproved land loan. This is a loan for a piece of land that has some utilities or access roads, but still lacks some features that make it ready for construction. It is easier to finance than raw land, but still more difficult than improved land. Lenders may require a lower down payment (around 20%), a moderate interest rate and a medium repayment term. You also need to have a good credit score and income to qualify.
Improved land loan. This is a loan for a piece of land that has all the utilities and access roads needed for construction. It is the most expensive type of land, but also the easiest to finance. Lenders may offer similar terms as mortgages, such as a low down payment (around 10%), a low interest rate and a long repayment term. You also have more options for lenders and loan programs.
Sources of land loans
Once you know what type of land loan you need, you can start looking for lenders who offer them. There are several sources of land loans, each with its own pros and cons:
Local banks and credit unions. These are usually the best sources of land loans, especially if they have a presence near the land you want to buy. They may be more familiar with the local market and regulations, and more willing to lend to local borrowers. They may also offer more flexible terms and lower fees than national lenders.
National banks and online lenders. These are usually the worst sources of land loans, especially if they don’t have a presence near the land you want to buy. They may be less familiar with the local market and regulations, and less willing to lend to risky borrowers. They may also offer less flexible terms and higher fees than local lenders.
Seller financing. This is when the seller of the land agrees to lend you money directly instead of going through a third-party lender. This can be a good option if you can’t qualify for other loans or if you want to avoid closing costs and fees. However, you need to be careful about the terms and conditions of the seller financing agreement, such as the interest rate, repayment schedule and default consequences.
Home equity loan. This is when you use the equity in your existing home as collateral for a loan to buy land. This can be a good option if you have enough equity in your home and if you plan to build your new home on the land soon. However, you need to be aware of the risks involved, such as losing your home if you default on the loan or having two mortgages at once.
Government-backed loan programs. These are loans that are guaranteed by government agencies such as the U.S. Department of Agriculture (USDA) or the Federal Housing Administration (FHA). These loans are designed to help low-income or rural borrowers buy or develop land. However, they have strict eligibility criteria and limitations on how much you can borrow and what type of land you can buy.