Land Loans: Everything You Need To Know

Nov 30, 2021 | Blog

Purchasing land isn’t only for the real-estate savvy, if you’ve ever wanted to build your own home or business, a land loan can help you do it. There are several different types of land loans for situations in both the residential and commercial markets. Conventional lenders, banks, and private lenders all offer land loans. Let’s discuss the pros and cons of land loans, what the right loan for your situation might be, and how you can get started.

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What is a land loan?

A land loan is a financing option for borrowers hoping to purchase or refinance a plot of land.

Land loans can be used for those building a house or business. They’re sometimes seen as riskier to lenders than your average mortgage loan because there is no building to use as collateral and there are potential risks during the development of the land. Most conventional lenders will not consider land loans

Though if you go with a hard money lender to acquire a land loan, they have more flexible guidelines for qualification.
To get the best interest rate on a land loan from a conventional lender, you’ll need a high credit score and low debt-to-income (DTI).

Hard money lenders, however, are more concerned with the value of the subject property, relationship with the borrower, and details of the deal. They also often develop working relationships with their borrowers, so if you’ve had successful deals with them in the past, they’ll be more likely to work with you again.

The types of land loans available

There are three common types of land loans. Which one you apply for will depend on your location and intended purpose for the land.

Raw land loan

Raw land is a plot of land that has not been developed, has no home on it, no sewers or electricity, and no roads on the land. If you’re planning to buy a completely empty piece of land, this is the loan in which you’ll need to apply.

This loan can be tricky to qualify for so be prepared to show your detailed plan for development. You want to show a lender that you are committed to the project.

Hard money lenders will also want to know your plan for the property in order to asses the deal.

Raw land is typically cheaper than other types but the loan will come with a significant down payment and higher interest rates.

Finished lot land loan

A lot loan is used for land that has been somewhat developed already. The land has usually already been zoned for residential or commercial use and may already have some infrastructure, utilities, and entitlements in place. Generally a finished lot will have curbs and gutters.

The down payment for this kind of loan can be lower since the situation is seen as less risky than other land loans due to existing developments such as water, electricity, or access to roads.

The land itself may cost a bit more because of its development but if you’re credit score is high, you may get a competitive rate on the loan with a conventional lender. A hard money lender may be able to consider other qualifying factors to finance the deal.

Construction land loan

Construction loans are a way to finance the construction costs for your land plans, and most also cover the cost of the land. If you’re building your own home or business building, a construction loan may be right for you.

This loan differs from a conventional mortgage in the way that its term only extends the length of the project. If you’re approved for the loan, the lender will pay for each phase of construction and will want to check on the progress regularly before dispersing the next phase of payments.

Once the project is complete, the loan can then be transitioned into a 15 or 30-year mortgage.

Similar to other types of conventional land loans, you should prepare for a 20% down payment and a detailed project plan which includes your budget and timeline. Borrowers should have a high credit score, low DTI, and stable income.

Hard money lenders also offer construction loans and don’t necessarily require proof of a stable income or high credit. They understand that many of their borrowers are self-employed, real estate developers, flippers, or in other unique situations. Hard money lenders can often give an initial land draw when funding a construction loan secured initially by land.

Pros and cons of land loans

Land loans can be great for those who are building their dream home or for entrepreneurs looking to jump-start a business. Especially those who choose to borrow from a hard money lender as their process is quicker than a conventional lender.

Undeveloped land can be an exciting deal and purchasing land in an up-and-coming area could be a smart investment for the future.

The downside of land loans, as we’ve noted, is that they can be difficult to qualify for, often requiring a large down payment and high credit scores.

You could get hit with higher rates on the loan than a typical home mortgage, as well, since land loans are seen as riskier to the lender.

How to get a land loan

You will need to apply and qualify for a land loan the same way that you do with a mortgage loan.

The different types of loans will have their own requirements, however, you can bet with a traditional lender that you’ll likely need an excellent credit score and significant down-payment.

A hard money lender might not care as much about your credit score. They’ll want to review your loan scenario, which you can submit for approval. They’ll review the details of your deal, your plan for the land, and how you intend to pay back the loan.

Get a Land Loan with Avantgarde Lending

Avantgarde Lending is a full-service hard money banking firm specializing in the origination, investment sale, and servicing of private real estate loans.

Marquee funds all types of loans in both the residential and commercial space for those who need a quick, no-nonsense deal. If the deal makes sense, you can get funding in 7-10 days. Contact us to start working with us today and get your unique deal financed.

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