5 OPTIONS WHEN CHOOSING A LAND LOAN
IBy BEN LUTHI
Bankrate
f you’re thinking about buying land, you’ll be hard-pressed to persuade a mortgage lender to finance your purchase. Instead, you’ll likely need to apply for a land loan.
Land loans aren’t as common as mortgage loans, so your options may be limited.
Also, you could end up with a shorter repayment period and higher down payment and interest rate than you’d find with a mortgage loan.
If you’re considering a land loan, it’s important to know what you’re getting yourself into and what options are available to reduce your costs.
Land loans are a type of credit you can use to buy a vacant lot to build a home on or raw land you don’t intend to develop.
Land loans tend to be riskier for lenders, says Casey Fleming, a mortgage adviser with C2 Financial Corp. in San Jose, Calif. Because of that, you may not get as favorable terms as you might get with a mortgage loan.
“Owners of raw land are much more likely to stop making payments and walk away from the property in the event of a financial event in their lives,” Fleming says. “And land is much harder to sell (than a home).”
The demand for land is smaller than the demand for homes. So, if a lender needs to foreclose on the land, there’s no guarantee it will get its money back.
As a result, some lenders require a substantial down payment and charge high interest rates on land loans. Also, some land loans have significantly shorter repayment terms than a 15- or 30-year term you might get with a mortgage loan.
There are five types of land loans you can get, each with its own terms and features. doesn’t have a broad portfolio of loans like a community bank or credit union.
As a result, you can expect high interest rates and a high down payment. Also, it’s unlikely you’ll get a long repayment term.
There’s no single best land loan for everyone, so it’s important to shop around to find the best one for your situation.
Before you do anything, Fleming recommends developing a comprehensive plan for what you plan to do with the land. Doing this can help you determine what type of loan is best and how long you want the repayment term to be.
Keep in mind that some lenders may have limits on how much they’re willing to finance. Others, Fleming says, may require a balloon payment, which is a large, one-time payment at the end of the loan term. “So, you may have to have a plan to pay it off before that payment comes due.”
As you consider your options, make sure you choose one that fits your budget and helps you achieve your ultimate goal with the land.