Dear Dr. Don,
I'm interested in buying some land. I want to know what type of loan would be best for this. What is the name of such loans for land purchases? I will have money to use as a down payment, at least the required percentage anyway. How do I go about finding the best interest rate for a land loan? The amount I want to borrow is about $80,000.
-- Rachel Rancher
When talking about land loans, one really is discussing something different from what people are accustomed to with home purchases and mortgages. The good news is that there are several avenues along which you can travel to your destination.
For lenders, land loans are riskier because the loan's collateral, the property, isn't being used for housing, at least in the near term. That makes it easier for an owner to walk away and leave the lender stuck with the land. Because of that risk, down payments and interest rates are higher for land loans than for mortgage loans.
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Types of loans
The type of loan you obtain depends on the property, as well as your plans for the land and the timing of construction. Even if you plan construction right away, make sure that the property is legally available for your planned use. Get the property professionally surveyed. The survey will identify the property lines, dimensions, any easements and access. Easements and access will influence the property's value. Access will also influence your ability to get a loan. Check with local officials about zoning. If you want to build in an area not zoned for development, you will need to seek a zoning change to meet your needs.
Once you are confident the land can be used as you plan, that's when you seek financing.
Before applying for a loan, check your credit score free at myBankrate.
Unimproved land, or raw land with no plans for improvement, is the toughest kind of property to borrow against. It is basically a speculative investment. Such raw land has no added improvements, such as sewers, utilities, streets or other structures. Even if you don't have any immediate plans for the property, you'll still owe annual property taxes.
Did you say "raw land loan"?
A raw land loan will have a higher down payment requirement and a higher interest rate than an improved property loan. Some lenders require a 50% down payment, but you should be able to find a lender that will require only a 20% down payment. A local lender that is familiar with the property may be more willing to work with you on the loan than a lender unfamiliar with the area. Many lenders treat raw unimproved land loans as commercial loans. If you find that's the case with the property you want to buy, the repayment terms, how the interest is calculated and other lending terms will vary from those associated with a residential real estate loan.