What Are The Pros and Cons of a Land Loan?


Do you have long term plans of purchasing a plot of land and building your dream home? If so, you are not alone. Lots of folks want the opportunity to purchase their own piece of land and build from scratch.

When you want to start construction on building a home and need financing, it is pretty straight forward. Most home buyers would procure construction loan financing and start their house building project.

What happens though when you are not ready to build and want to buy a lot? This is exactly where land loans come into play. With a land loan you will be able to buy and hold until you're ready to start construction.

Let's go over some of the finer points you should know about land loan financing.

What to Know About Land loansDeposit photos

What is Land Loan Financing?

In order to start a new business, build a home from the ground up, or take on a new farming venture, you will need to acquire land. A land purchase mortgage allows you the opportunity to accomplish these goals fairly easily.

However, it is essential to note that getting a land loan is a bit more challenging that getting a traditional home mortgage. Not every lender will do land loans. They are a much more specialized loan product.

Some of the better sources for land loan financing include community banks and credit unions. Land buyers using these loans should understand that they typically have higher interest rates, more significant down payment requirements and shorter loan terms.

Different Types of Land Loans Explained

Land loans come in many different variations. Let's take a look at some of the most common.

Raw Land Loan

Raw land is undeveloped. Nothing has been done to it and it remains in its natural state. There are no roads or public services. When you want to purchase this kind of property it's known as a raw land loan. Procuring land loan financing when the land has no improvements is more challenging.

Land such as this is usually for builders and developers who have experience building subdivisions. You will typically need a comprehensive plan to submit to the lender. Substantial down payments and excellent credit scores are required.

Improved Land Loans

Improved land loans are far better for mortgage lenders because they are less risky. Improved land includes those that have roads, water, and other utilities. Land that has improvements is far more valuable because it is almost guaranteed that it can be built on.

Interest rates and other terms on these types of land loans tend to be more favorable than their undeveloped counterparts. The down payment requirements may also be a bit more relaxed.

What Are The Pros and Cons of Land Loans?

With most loans there are advantages and disadvantages. Let's review the pros and cons of land loans/

Pros For a Land Loan

  • A land loan provides a purchaser with the ability to finance land with the intention to build at some point in the future.
  • A USDA land loan may provide the opportunity to get a no down payment mortgage.
  • Given that they are buy and hold loans, buyers don't need to feel rushed into immediately starting their building project.

Cons For a Land Loan

  • The interest rates charged on land loan are almost always higher than home loans.
  • Finding lenders that will provide land loans is more challenging that a traditional home mortgage.
  • Most of the time you will not be able to get a longer term loan when financing land.

Concluding Thoughts

Land loans are a type of loan that can be used to help you finance the construction of a new home or business venture. Maybe instead of moving into a larger home, building a custom home suites you better?

While this may be the case, it is important to know that they are not as straightforward as most loans.

Research and due diligence will become more essential with this type of loan. Working with a mortgage broker or banker who is familiar with land loans will be very helpful.

Make sure you have a detailed long term plan on how much your home is going to cost. What will matter most is the end result of your land loan combined with the expense of building your dream home.

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Bill Gassett is an avid writer for numerous real estate topics including finance, mortgages, moving, home improvement, and general real estate. His work has been featured on numerous prestigious real estate publications.

Massachusetts State

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