Land Loans: Everything You Need To Know
Land Loans: Everything You Need To Know

Sometimes when potential home buyers are looking to purchase a home, they may also consider building one. The thought can seem perfect until future homeowners realize what it might cost to build a house. Though building a house can be expensive, there are many ways to make it more feasible for first-time homeowners. Land loans are one of these resources.

If you choose to build a house, chances are you might have to apply for a land loan. While Rocket Mortgage® does not offer land loans or lot loans, we understand the importance of educating our clients.

What Is A Land Loan?

A land loan sometimes referred to as a lot loan is used to finance the purchase of a plot of land. You can take out a land loan if youre interested in buying a piece of land to build a home or to utilize for business purposes. The type you take out will depend on where youre buying land and how you intend to use the land.

A land loan is sometimes confused with a construction loan, which is another type of loan often used by people looking to build a house. So, whats the difference? Typically, if you want to buy land and start building on it right away, youll want a construction loan. These short-term https://maxloan.org/payday-loans-fl/ loans are intended for prospective home builders who want to get started on their project right away and already have everything planned and ready to go.

Land or lot loans, on the other hand, are a better choice for future home builders who have a plan but may not want to jump right into building and financing a house immediately. If you have circumstances pushing your building project out a year or so (or youre still getting your home plans together) a land loan is likely a better choice for you.

Raw Land Loan

Raw land completely undeveloped land with no electricity, sewers or roads. If this is the type of land youre interested in, this is the loan type for you. Because it can be hard to get financing for undeveloped land, its important that you create a solid, detailed plan for how you want to develop the land. This will show lenders that youre committed to the project and dont pose as great of a risk.

You can also increase your chances of qualifying if you make a large down payment (typically 20%+) and have good credit. While the purchase price of raw land can be cheaper than developed land, raw land loans do have higher interest rates and significant down payments compared to other land or lot loans.

Unimproved Land Loan

Unimproved is similar to raw land, but it tends to be more developed. Sometimes unimproved land has some utilities and amenities, but typically lacks an electric meter, phone box and natural gas meter. While an unimproved land loan isnt as risky as a raw land loan, it can still be difficult to obtain, so make sure you have a detailed plan, large down payment (20% down or more) and a strong credit score. Because unimproved land loans arent the riskiest type of loan, the down payments and interest rates wont be sky-high, but its common for them to be higher than other types of loan financing.

Improved Land Loan

Unlike raw land and unimproved land, improved land has access to things like roads, electricity and water. Improved land is the most developed type of land, so it may be more expensive to purchase. However, interest rates and down payments for an improved land loan are lower than they are for a raw land loan or unimproved land loan. Nonetheless, it's still important to make a significant down payment and have a good credit score.

Land and lot loans are obtained in the same way a buyer would obtain a mortgage loan, but unlike receiving a dollar amount assigned to the property, it can be harder to determine what the land is worth because there is no property collateral. This means that land loans are a riskier transaction for lenders, which results in higher down payments and interest rates than a typical home loan. Your average land loan interest rate will likely be anywhere from 4% - 5%+, which is nearly double the typical current interest rate for a home loan.

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