The 3 Types of Land Loans & What to Know About Each
There are times when a new home search can be very frustrating. The homes you tour have some of the features you want, but not all of them. Even if you find a home that checks off everything on your list, the price may be more than you’re willing to pay – and there’s always a risk that a home inspection could uncover a problem that makes you want to walk away. At this point, some people will begin to consider having a home built instead of purchasing an existing one. But finding the perfect plot of land on which to build and securing funding for it can be easier said than done.
What Are Land Loans?
Also known as a lot loan, a land loan is a sum of money given to a buyer for the specific purpose of purchasing a plot of land on which to build. Land loans can be used to purchase either residential or commercial plots. Some people think that a land loan and a construction loan are the same, but that isn’t the case. A construction loan is a short-term loan that is meant for someone who has all the materials ready to go to start building. Land loans, conversely, are meant for people who want to build but need a bit more time to put together a plan. If your building project is not likely to begin for a year or so, a land loan is a much better option.
Types of Land Loans
There are three main types of land loans: the raw land loan, the unimproved land loan, and the improved land loan. Let’s examine them in detail.
Raw Land Loans
A raw land loan is a loan processed to purchase a completely undeveloped plot of land – no electricity, no sewers, and no roads. It can be difficult to secure this type of loan, so you’d better have a solid building plan to show potential lenders. A large down payment of 20% or greater will also help, as will a good credit score. Though the price tends to be lower for raw land, the loan you’ll need to purchase some will probably have a higher interest rate.
Unimproved Land Loans
An unimproved land loan is a loan for a plot of land that is slightly more developed than raw land. For example, the plot may be connected to some utilities, but it typically won’t have an electric or natural gas meter or a phone box. While an unimproved land loan isn’t as difficult to secure as a raw land loan, it can still be tough. If you’re going to apply for one, make sure you have a plan for the land, a good credit score, and a down payment of at least 20%. Finally, since unimproved land loans aren’t as risky as raw land loans, the down payment requirements and interest rate are typically better than a raw loan, but still quite high when compared to loans in general.
Improved Land Loans
Last but not least is the improved land loan. The plot involved will already have access to roads as well as electricity and water hookups. But keep in mind that the listing price may be higher due to these improvements. In turn, however, the interest rate and down payment requirements are typically lower for improved land loans than the other types of loans. To secure one, you’ll still need a solid credit score and significant down payment.
Advantages & Disadvantages of Land Loans
If you have a solid plan and vision for what you want to do with the land already, a land loan can be a good idea. It gives you the chance to construct your home exactly as you wish.
However, since there is no physical collateral involved with a land loan as there would be with a standard mortgage, the loan is automatically riskier for the lender. Furthermore, you would have to contend with the possibility of a sudden building material shortage, which could delay the build. So, before you take out money to buy land, ensure you have a strong plan in place as well as back-up plans to handle the unexpected.
Davis Custom Homes Can Help
If you’re considering a land loan in Iowa, Nebraska, or the Sioux Falls, SD or Houston, TX areas, Davis Custom Homes is here to help you. Our team can help you navigate the difficult world of land loans and all types of new home construction loans. We work directly with you to help you secure a loan for the land you want to build on. Contact us if you need help with a loan for land purchase today!