What Is A Land Loan?
An assessment loan – sometimes called a lot loan – is used for financing the purchase of a piece of land. If you’re planning on building a house or running a business on a piece of land, a land loan can be helpful. The type of loan you take out depends on where you plan to buy land and what you plan to do with it.
People who want to build a house sometimes confuse a land loan with a construction loan, another type of loan. But how are they different? A construction loan is typically required if you want to purchase land and begin construction right away. The short-term loans are designed for prospective homebuilders who have everything planned out and are ready to start right away.
For future home builders with a plan, but who may not want to jump right into building and financing a house immediately, land loans are a better choice. A land loan is a better option if your building project will be delayed for a year or more (or if you’re still drafting your house plans).
The three most common types of land loans are raw land loans, unimproved land loans and improved land loans.
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Raw Land Loan
A pure, untouched piece of land with no electrical service, no sewage and no roads is raw land. You should choose this loan type if you are planning to purchase this type of land. You should create a detailed plan for how you intend to develop undeveloped land because it can be hard to get financing. You’ll demonstrate to lenders that you’re committed to the project and don’t pose a huge risk.
A big down payment (typically 20%+) and good credit can also increase your chances of qualifying. Compared to other types of land or lot loans, raw land loans do have higher interest rates and significant down payments, even though the cost of raw land may be lower than that of developed land.
Unimproved Land Loan
Raw land is similar to unimproved land, but it is more developed. Although unimproved land sometimes has some utilities and amenities, it often lacks an electric meter, a phone box, and a natural gas meter. Unimproved land loans aren’t as risky as raw land loans, but they can still be difficult to obtain, so you’ll need a detailed plan, a significant down payment (20% down or more), and good credit. Because unimproved land loans aren’t the riskiest type of loan, the down payments and interest rates won’t be sky-high, but it’s common for them to be higher than other types of loan financing.
Improved Land Loan
In contrast to raw land and unimproved land, improved land has access to things like roads, electricity, and water. Land that has been improved may be more expensive to buy because it has been developed the most. Nevertheless, improved land loans have lower interest rates and down payments than raw land loans or unimproved land loans. In spite of that, it’s still crucial to have a good credit score and make a large down payment.
Loans for land and lots are obtained in the same way a buyer obtains a mortgage loan; however, there is no collateral, so determining the value of the land can be more difficult. Land loans are riskier for lenders, so they require higher down payments and interest rates than normal home loans. Land loan interest rates typically range between 4% and 5%+, which is nearly double what a typical home loan interest rate is today.
Pros And Cons Of Land And Lot Loans
Those who have considered applying for a land loan have probably realized there are some benefits and drawbacks. For your convenience, let’s go over a few of these pros and cons and see what they mean for your personal needs and financial situation.
Pros – An application for a land loan can provide many benefits to a person interested in building a house or business. Having the opportunity to build the home of your dreams is by far the biggest benefit. Commercial property can also offer businesses the chance to capitalize on up-and-coming areas if they are looking to use the land for commercial purposes. You may consider a land loan to build a home or business if you have a vision and are creative and patient.
Cons – Understanding the realities and drawbacks of applying for a land loan is important. Due to the riskier nature of the transaction, there is less collateral, so lenders are less likely to lend to borrowers. Additionally, there is the potential for higher down payments and higher interest rates when it comes to financing. A new construction project may also encounter unforeseen complications and other issues.