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The Ins and Outs of Land Loans

By Edited Nov 13, 2013 0 0

If you're in the market for a piece of land and are curious about the various types of land loans, read on. In this article we will discuss the differences between land loans and mortgage loans, the types of land loans available, how to find the right property so you can qualify for a land loan more easily, and how to find a good land loan lender. By the end of this article you should have enough information to enable you to get a better deal when you apply for any number of the land loans on the market.

How are Land Loans Different from Mortgage Loans?

Land loans represent a larger risk to banks because the collateral, in this case the land itself, isn't being used. In the bank's opinion, the lack of use increases chance of the borrower walking away from their property and leaving an unpaid loan behind. In order to protect themselves from this risk, banks require a larger down payment and higher interest rates on loans for land.

Unlike home mortgages that typically have a term of 30 years, a land purchase loan generally has a repayment term of 10-15 years.

Additionally, while mortgage interest can be deducted on your income taxes, the interest on a land loan can only be deducted in certain circumstances. If you are keeping the land as investment you may be able to qualify for the interest deduction but it is in your best interest to discuss this with a qualified financial advisor.

Types of Land Loans

There are a few types of land loans available. In general land loans are more difficult to qualify for and they require a high down payment and a higher interest rate than a mortgage. Here is a brief overview of some of the more common land loan types.

Raw Land Loan - This type of loan will have more strict requirements than a loan for improved property. Expect higher interest rates and up to a 50% down payment, although some lenders may only require 20%.

Improved Vacant Land Loans - These types of land loans are the easiest type of land loan to obtain, particularly if you have immediate plans to use the property to build upon. The lender will be repaid with the proceeds of the mortgage when a structure is put on the property therefore this type of loan is less risky.

Farm Land Loans - If you're planning on purchasing farm land, you will want to investigate farm land loan programs through the Farm Service Agency (FSA). The FSA makes loans and also guarantees loans for small, family-sized ranchers and farmers. The FSA has particular programs for people who cannot qualify for traditional commercial loans through banks or other lenders. If you are serious about farming, FSA programs may be for you.

Seller Financing - Occasionally a seller will finance the sale of their property, allowing you to make payments to them over time. If you find this kind of deal, make sure you discuss it with your lawyer and make sure you investigate the property to ensure there are no hidden defects.

Home Equity Loan - If you have equity in your current residence, you may want to consider a home equity loan to finance your land loan. You will find that you will be able to get a much better interest rate since your home will act as collateral for the loan.


Finding the Right Property

Since raw land loans can be difficult to obtain, it makes sense to look for property that will fit most banks criteria when you go to apply for a loan. Here are a few things to look for when you begin your land search.

1. It is more difficult to get a raw land loan than it is to get a loan on improved property. If you can, find land that has some improvements on it already. Utilities or other improvements will help you when it comes time to apply for a land loan.

2. If you decide to purchase raw land, make sure that the utilities you plan to add later are available. Get an official survey and make sure you fully understand the access rights. If you don't have clear access rights you may have problems getting a raw land loan.

3. Verify clean title and make sure there are no other issues that could raise a red flag to the lender.

How to find a Land Loan Lender

Getting a good land loan can be a challenge. It can be to your advantage to work with a local lender particularly if you are considering buying raw land. A local lender will be more familiar with the area and possibly the property itself.

When it comes time to apply for a mortgage land loan, the best way to find a good lender is to ask for referrals. Ask your friends, family and co-workers for their recommendations of mortgage lenders and brokers. A great source of referrals will be your real estate agent who may be able to point you at a land loan specialist in your area.

There are also several online land loan lenders available. Online lenders can be a great resource and allow you to compare quotes from the privacy of your own home.

Conclusion

Land loans differ from mortgages in several ways and it is important to keep those differences in mind when looking for a loan for land. Expect higher interest rates and a larger down payment requirement. When you shop for your land keep in mind the types of land loans available and try to find an improved piece of property as you will be able to qualify for better rates. Ask friends and relatives and your real estate agent for referrals when it comes time to find a lender for your land loan. There are several programs on the market and since programs can vary greatly it pays to shop around. With the information you've learned from this article you should be able to identify the type of land loan you are likely to need and have a few great tips of where to go to find a good land loan deal.


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