While nothing quite compares to buying a dream home, building one takes the dream to a whole new level. The first step forward in this exciting endeavor is to buy up the land your home will sit on, which can be a pricey venture, not to mention all of the costs involved in building your home. This is where a land mortgage loan comes into play.
Top Land Purchase Financing Personal Loan Providers
Personal Loan to Buy Land
A land purchase loan is a loan specifically designed for those looking to buy a plot of land. Like any other loan type, land financing can be done the traditional route—through a bank or credit union—or through an online lender, which may offer more favorable land loan rates.
Unlike other loan types, especially a mortgage where a specific dollar amount is assigned to a property, a land purchase loan may be more difficult to compute. Because there is no collateral or asset on the land, a borrower can default on a Land Purchase loan more easily than if they default on a car or house.
Moreover, the land is not as easy to sell as a house, as it is not as much in demand. For this reason, you can expect interest rates and the down payment for Land Purchase loans to be higher, as there is more at risk for the lender. Therefore, you need to carefully plan how you will use the land tied to a Land Purchase loan agreement. Doing so will give you the motivation to use the land so it will become more valuable.
Good terms to know
- Collateral: This is an asset that a lender can seize in case a borrower defaults on their loan. Collateral may be sold to recoup some or all of the losses on the loan.
- Loan-to-value ratio (LTV): This term is used by lenders to examine the ratio of a loan to the value of an asset, such as a piece of land purchased.
- Interest rate: This is the amount charged by a lender on top of the amount borrowed.
- Annual Percentage Rate (APR): The total annual rate charged for borrowing from a lender.
- Credit score: A three-digit number that represents how risky you are as a borrower based on your credit history.
Types of Land Loans
There are several types of land loans to be aware of when searching for the best land loan lenders and before applying and comparing land loan rates. Let’s take a look!
- Raw Land Loans – This loan type is used for a piece of land that will not be developed or built upon. It’s the riskiest of all lot loans for lenders since there is nothing significant to use as collateral, such as a building or home.
- Vacant Land Loans – This type of loan is for a piece of land that will undergo some type of renovation or improvement so that they’re ready for construction. It’s for those who intend to build on top of the land.
- USDA Land Loans – If you intend to purchase land in a rural area for farming or other agricultural purposes, you may qualify for a USDA loan. This subsidized loan secures property that will build new farms, establish crops, enhance existing farming operations, or for alternative farming methods.
- SBA 504 Loan – A Small Business Administration (SBA) 504 Loan is for businesses that intend to buy up land for commercial development. With this type of loan, the SBA works with a lender to secure the property value so that the business owner will only have to supply a 10% down payment. SBA and the lender finance the rest.
- Construction Loans – This loan option is for those intending to construct on their land but doesn’t want to deal with taking out two loans. With a construction loan, the money will be used to finance not only the land itself but also the construction work.
Top Land Loan Reviews
Land Purchase Financing – How to Get Started
To apply for a personal loan for a Land Purchase, you will need to take the following steps.
- Check Your Credit Score. When you apply for any type of personal loan online, you need to review your credit score first through the 3 credit bureaus. Because your personal loan for a Land Purchase is primarily based on your credit score, knowing the score will help you determine what APR you will be charged.
- Select Your Loan Type. Some companies specialize in Land Purchase loan funding, so it is better to go through them if you want the best rates for this loan type.
- Get Prequalified for Land Purchase Loan Financing. When you choose several lending providers you like, you will need to get prequalified for your construction loans for land next. Doing so will give you the repayment details and terms for your Land Purchase loan funding requirements. If you agree to shorter loan terms, you can also get a lower fixed APR.
- Compare the Lenders. After you have had a chance to get prequalified through different Land financing options, you can review their loan terms and APRs, and see which one fits best with your lending or personal finance requirements. For a Land Purchase personal loan, go with a lender that offers the lowest APR and features the lowest fees over the term of the loan.
- Supply the Necessary Info and Documents. When you choose a lender, you will need to provide the required loan documents and information for Land Purchase loan funding. In this case, you need to supply the following details and documents:
- Personal Identification (Social security card, passport, or driver’s license)
- Proof of earnings or income (W-2s, paystubs, or filed tax returns)
- Employer information (Name of company, manager’s name, and phone number and address)
- Banking information (account details, including the routing and account numbers)
- Proof of residence (utility bill with your name and address or a lease agreement)
- Apply for the Loan and Start Making Payments. After you apply for your Land Purchase loans and start making payments, you might add some extra money to your payment each month to repay the loan faster. Doing so will make the loan repayment smoother and simpler.
Personal Loan for Land - All You Need to Know
To take out a Land Purchase loan, you should be aware of the following terms:
- Annual Percentage Rate (APR) – The rate of interest charged on a Land Purchase loan, expressed at an annual rate.
- Application Fee – The amount a lender charges for processing a Land Purchase loan application and the related documents. These fees are usually non-refundable and may or may not be included in processing a Land Purchase loan.
- Collateral – An asset or property secured against a loan. The land you buy with a Land Purchase loan does not feature assets, such as buildings, so the online financing is non-collateralized.
- Debt-to-Available Credit Ratio – When considering you for a Land Purchase loan, a lender may look at your debt-to-available credit details. This represents the money you owe compared to the credit available through credit lines and credit cards. Therefore, the debt-to-available credit ratio shows how much available credit you are using. The higher this percentage, the riskier you appear to a lender.
- Debt-to-Income Ratio – The percent of your monthly pre-tax income used to pay off debts, such as auto loans, credit cards, and student loans. Lenders assess 2 key ratios. The first ratio is a front-end ratio or the percent of monthly pretax earnings spent on your house payment. The second percent is a back-end ratio or the other debts that are factored into the house payments.
- Late fee – A fee charged to customers who take out a Land Purchase loan who pay a payment late or pay less than the required monthly amount.
- Late Payment – A delinquent payment or a failure to pay on a Land Purchase loan before the agreed due date. A late payment can hurt your credit score for as long as 7 years.
- Loan-to-Value Ratio (LTV) – A Land Purchase lender uses this ratio to assess the value of a loan to an asset, such as land.
- Land Purchase Loan Lender – The financial institution that provides a Land Purchase loan for paying for a parcel of land.
- Net Income – Your income after taxes has been deducted. It is also called your take-home pay. A lender considers this amount when assessing your ability to repay a loan amount.
- Prepayment Penalty – A fee charged by a lender when a borrower pays off a loan before its scheduled term. Usually, prepayment penalties are not applied by standard lenders. If you are taking out a subprime Land Purchase loan, you need to read the loan terms carefully, as this fee may be applied.
- Principal – The amount of money owed on a Land Purchase loan, excluding the charged interest or APR.
- Risk Score – Another name for a credit score.
- Subprime Borrower – Some people who request a Land Purchase loan funding may be subprime borrowers. A subprime borrower usually has a poor credit score because of late payments or collection accounts. Lenders evaluate and grade subprime borrowers on the degree of past collection problems – A to D, or lower. Subprime borrowers can qualify for personal loans for land but at a higher interest rate.
- Utilization Ratio – A ratio that shows a lender how much available credit you are using.
- Unsecured Loan – Most personal loans online are not collateralized. If you take out a personal loan for a land purchase, it is usually unsecured. Therefore, the lender assesses your ability to repay based primarily on your credit score.
Land Loans vs. Mortgages, What’s the Difference?
While they seem similar, mortgages and land loans are two very distinct loan types.
- Purpose – One major distinction is the purpose of each loan. A mortgage is used to buy a home, plain and simple. A loan for land purchase, on the other hand, is used to buy the land a home will sit on. So those looking for land financing are most often doing so with the purpose of constructing a home on it. Some land loans will cover the costs of building the home, but most will only cover the costs involved in preparing the raw, unpolished land for construction.
- Collateral – Another big distinction between a mortgage and a loan to buy land is the value of the collateral. A piece of land is almost always worth less than that same piece of land with a home on it. Consequently, the collateral for a mortgage is worth much more than the collateral for a land loan. Because of this, plus the fact that it’s harder to determine the value of a plot of land, you have a lower loan amount, or in other words, a low loan-to-value ratio.
- Risk factor – As mentioned earlier, loans to buy land are a riskier transaction than mortgages since they’re less valuable collateral. They’re also riskier for borrowers due to their low loan-to-value ratio. So for example, if you take out a land loan for $100,000 to develop a piece of land worth $400,000, defaulting on the loan would mean losing out on $300,000 of value. On the other hand, mortgages aren’t as risky in this sense because they’re typically at 80-90% loan to value. So in other words, a borrower will put down 10-20% and lose out on much less if they default.
Conclusion
Purchasing a plot of land may feel like an unfamiliar and even daunting undertaking, but it can be a relatively straightforward process once you know what’s involved. If you have a clear plan for the land you plan on purchasing. The next step is to determine which loan type fits your needs and look at current land loan rates to find the best land loan, the lender.
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