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How Do Mortgage Loans Work? A Beginner's Guide

Understanding the Land Purchase Loan Process

How Do You Qualify for a Land Loan

 

How Do Mortgage Loans Work? A Beginner's Guide


Most people don't have enough cash on hand to buy a house, so they borrow money through mortgage loans. In fact, approximately 78% of home sales require mortgages.

You might need a loan if buying a house is your dream, but how do mortgages work? If you've never had one, you probably have questions.

Mortgage loans aren't complicated, but you should know some things before applying for one. This guide will discuss the basic concepts of mortgages and how they work. Continue reading to learn more. 


Basic Principles of Mortgage Loans

Taking out a mortgage loan is a tremendous responsibility, as it requires a long-term commitment. People often rent before buying, but it's important to understand the differences between renting and owning.

When you own a house, you pay a mortgage monthly, but you can't get out of the loan without selling your house. Therefore, you're tied to it.

Secondly, homeownership requires the responsibility of repairing and maintaining the property. In other words, you pay the costs of these expenses. 

Your mortgage loan comes with terms, including a specified number of payments, interest rate, and payment amount. Your lender will determine your payment amount by factoring in the following things:

  • Loan amount
  • Loan duration
  • Interest rate

You can choose from a 15-year loan or longer, but most people choose 30-year loans. A 30-year loan gives you 30 years to repay the money you borrow.

Each payment decreases your mortgage loan balance but not by the full amount of your payment. So instead, your payment pays for two things.

First, it pays the principal balance of your loan, which is your mortgage balance. Secondly, it covers the interest fees your lender charges for issuing the loan. 

You will pay more interest on the loan at first because your loan balance is higher. However, you will pay less interest as you pay down your principal balance.  

Your mortgage lender will give you an amortization schedule that shows you the breakdown of principal and interest for your loan. 

You have the freedom to pay extra monthly payments to repay the loan faster. You can ask your lender how this works if you have questions. 


Various Types of Mortgages

The second thing to understand is there are different types of mortgages. Mortgages come in different forms, yet one type might be better for you than the others. 

Here are several types of mortgages you can choose from:

Conventional Loans

A conventional loan meets specific industry standards, making them easy for lenders to sell. However, you might need more money down on a conventional loan and a higher credit score. 

VA Loan

The Department of Veterans Affairs is an organization that insures VA loans. However, the VA doesn't issue these loans; lenders do. Anyone with military experience might qualify for a VA loan, and these loans offer benefits.

They have lower down payment requirements and competitive interest rates. However, they require paying a one-time fee to the VA. 

FHA Loan

FHA loans are also popular loan options. The Federal Housing Administration insures these loans, which are ideal for first-time homebuyers. They have low down payment requirements and credit score criteria.

You can learn more about home loans and options before choosing one.


Application Process

As you begin understanding how mortgages work, you might have some questions about the application process. Applying for a mortgage takes effort and isn't an overnight process.  You can begin by looking for the best bank for mortgages, such as Farmers Bank. Then, when you find the right bank to use, you can ask them how to begin the application process. The bank will discuss the application process and mortgage rates and answer your questions. Additionally, they'll give you an application. You must complete the application and give it to the bank when finished. You must also provide the bank with the documents they ask for, such as your tax returns and pay stubs. Additionally, you must consent to a credit check. 

Lenders thoroughly review every detail of a person's application before answering them. During this review, they'll look at several vital things, including the following:

Credit

Lenders must ensure that a person is creditworthy before approving their loan. They do this by analyzing your credit score and comparing it to their standards. 

Financial Means for Repayment

Secondly, they will evaluate your income and expenses to ensure you can repay the loan. The primary tool they use is the debt-to-income ratio, which reveals a lot to the lender about a person's repayment abilities. 

Steady Income

Finally, they'll examine your job and income to look for several things. The primary thing is that you have a steady job that will continue providing you with the income you need to repay the loan. 


Other Expenses You Might Pay With Your Mortgage

If the lender approves your loan, you can go through with a home purchase. Once you close on the home purchase, you must begin repaying your mortgage loan monthly.

Your mortgage loan payment will include principal and interest, but it might also include several other expenses. 

First, it might include private mortgage insurance (PMI). If your mortgage loan requires PMI, you will pay this monthly. 

Secondly, you might need an escrow account to pay for your home property taxes and insurance. If so, you will pay extra each month to cover these costs. 


Learn More About the Mortgage Loan Process

Most people get mortgage loans to buy homes, and you might also need one to make your dream come true. Owning a home is rewarding, and it's a great goal to have.

If you'd like to learn more about mortgages, contact us. At Farmers Bank, we offer mortgages and can help you learn more about our products. Visit our site or call us to learn more.




Understanding the Land Purchase Loan Process

Did you know that the minimum down payment for raw land is 35%?

Are you wanting to buy land? If you are, you must secure a land purchase loan first.

This loan is a process you must go through before buying the land. Since purchasing land is a serious commitment, having the funds ready to go is necessary.

Securing the funds for buying land will take time. Why not use that time to learn about the land purchase loan process?

Want to learn that process? Read on to find out!


The Basics of Land Loans

The land purchasing process starts with what the potential sale entails. Buying land is different from buying a home or another type of property. Here are the things to look out for when getting started.

Boundaries

Before you can even think about land loans, you need to know the boundaries of the land. Imagine if you were to buy land accidentally, thinking it was part of your property, only to find out it wasn't.  Surveys will help determine the boundaries of the land. Once you have that information, you can start to look into land loans.

Zoning

The next thing to consider is zoning. You need to guarantee that the land you want to buy becomes zoned for what you want to do with it.  For example, let's say you have land zoned for farming. If so, you can't use it for commercial purposes. If you're unsure about zoning, you can consult your local zoning office or the land's current owner.

Title Search

You also need to do a title search. This search will help you determine if there are any liens or encumbrances on the land.  A title search will also help you determine the rightful owner of the land. This search is essential because you don't want to buy land that belongs to someone else.

Access

Utilities play a significant role in land loans. After all, what is the use if you can't get to it or use it?  The first thing you need to consider is access. How will you get to the land?   Is there a road already in place? If not, how much will it cost to build a road? You also need to think about utilities.   Does the land have electricity? How much will it cost to run power if not?  Does the land have water? If not, you'll need to drill a well. These are all important considerations when taking out a land loan.


Now that you know the basics of land loans, it's time to start the loan process.


What Are the Different Types of Loans?

There are different types of land loans, each with its own set of terms and conditions. Here are the three types of land loans:


Raw Land

Raw land loans are for undeveloped land. Developers or investors who plan to improve the land are the ones that'll use this loan.  The terms of a raw land loan are usually shorter than other types of land loans. That is because the land is more of a risk for lenders. The down payment for a raw land loan is also usually higher. This higher payment is again because the land is a financial risk.

Unimproved Land

Unimproved land loans are for land that often doesn't have any improvements. People who want to build a land-based home are the ones that use this type of loan. The terms of an unimproved land loan are usually shorter than an improved land loan. Why is this? The risk makes the lenders shorten the times, so that chances of defaulting are lower.  The down payment for an unimproved land loan is also usually higher. Unimproved is like raw. There's a slight difference.  There might be some development. As well as some access to utilities. That means it's more affordable and accessible than a raw land loan.

Improved Land

Improved land loans are for land that already has access to utilities. It's also the most developed land. As well as access to roads and amenities.  The terms of an improved land loan are usually longer than a raw land loan. That is because the financial risk of this land is lower.  These lands are more expensive than unimproved or raw land. The good news is that interest rates are lower. And the conditions for down payments are lower, too.


How to Qualify for a Land Purchase Loan

You want to know how to take out a land loan. But first, you have to qualify for one. There are different qualifications since there are different types of land loans.  General guidelines do exist for these loans. Like any other loan, the lender will need to see evidence of your ability to repay the loan. That includes taking a look at your credit source and debt-to-income ratio They might also want to see the land as collateral for the loan. Why is this done? It gets done in case you default on the loan.  Sometimes land becomes collateral in place of a down payment. That is because land can often appreciate in value.  Credit scores will decide the percentage of a down payment you'll have to make. Thus, time allowing, it's a good idea to improve your credit score before applying for land loans.

For a raw land loan, the lender will need to see evidence that you have the means to develop the land. This evidence might include a business plan or land development experience.

For an unimproved land loan, the lender will need to see evidence that you have the means to build a home on the land. This evidence might include building permits or land surveys.

Of course, improved land doesn't need as much of an explanation. The land already has access to utilities and roads.

 

Get a Land Loan Today

Now you know everything there is to know about a land purchase loan. Loans for land are different from other types of loans. Land can often appreciate in value. That makes it a good investment. It's crucial to do your research before taking out a land loan. Now that you know how to qualify for land loans, you're ready to start the process. Reach out to a land loan specialist today.

Looking for a loan now? Contact us so we can help you start the process!




How Do you Qualify for a Land Loan?


Whether you're thinking of building a home, starting a land-based business, or buying yourself a hunting plot, increasing land prices might mean that you're considering financing your purchase of a plot of land.

Land loans can be a good option whether you intend to use the property for personal or commercial purposes. While the process of getting a loan for land looks similar to that of a traditional mortgage, it's worth understanding that land loan qualifications are usually more stringent than the criteria for a primary residence.

So, how do you qualify for a land loan if you want one?  Let's take a look at what you need to know.


What Is a Land Loan?

A land loan is a lending product that you can use to finance buying a piece of land. You might also hear these called lot loans.  You might want to get a land loan if you want to use a piece of land for business purposes or if you're building your own house. People also sometimes use construction loans when they are going to build a house. This type of loan is more suited for when you're planning on starting to build right away, as they're short-term loans.  If you want to buy a piece of land but you aren't planning on building right away, a land or a lot loan is probably a better choice.

Are you looking for an agricultural loan in Idaho? If so, check out the agricultural loans we offer here.

 

How to Qualify For a Land Loan

Working with a community bank in your area is usually the best option when it comes to getting a land loan. You might find that you can qualify for other types of loans beyond land loans depending on your intended use for the property. For instance, you might be able to get a USDA loan or a USDA construction loan if you're planning on building a house in a rural area.  If you want to buy land for a business, you might also qualify for an SBA 504 loan. 

It's worth understanding that the land loan qualifications are typically stricter than those for buying a residential property. While the process is similar to that of getting a regular old mortgage for a house, you will need to meet more stringent criteria for a land loan.  The reason for this is that land is typically considered riskier to lenders than properties with a home already on it. In order to qualify, you'll usually need a DTI of no more than 50%, excellent credit, and a consistent source of income. Lenders will also ask how you intend to use the land, so it's a good idea to have a detailed plan ready ahead of time.


What Are the Different Types of Land Loans?

There are a number of different types of land loans. While the type of loan you apply for will depend on what makes sense for your particular situation, some of the most common lending products for land are raw land loans, improved land loans, and unimproved land loans.

Raw Land Loan

If you are looking to buy a piece of land that doesn't have any roads, electricity, or sewers, a raw land loan is going to be your best bet. It's important to create a detailed and thorough plan of how you expect to develop the land because it can sometimes be difficult to get loans for undeveloped land. By making a plan, it shows potential lenders that you are serious about the project and therefore less risky as a borrower.  Making a large down payment can also help to increase your qualification chances. It's also important to have good credit. Usually, you'll need to make a higher down payment and pay higher interest rates for a raw land loan than for other types of loans.

Unimproved Land Loan

Unimproved land might have some amenities and utilities but it is missing some important details. These might mean it doesn't have a natural gas meter, a phone box, or an electric meter, for example.  These loans can also be difficult to get but not impossible. It's equally important to have a detailed plan, be willing to put down a big down payment, and have good credit.

Improved Land Loan

Improved land has access to important utilities and amenities like electricity, water, and roads. This type of land might have a higher listing price but you will also find that you don't have to put down as big of a down payment or pay as high of interest rates as you would for either of the other two types of land loans we've discussed.  That being said, you should expect that the terms and qualification standards for an improved land loan will still be higher and stricter than for a traditional mortgage. Because financing land is seen as a riskier endeavor for lenders, they will want to make sure that you are invested in the project and that they can expect you will pay back the full loan amount on time.

 

Are You Shopping For a Land Loan?

Farmer's Bank is an independent community bank located in southern Idaho. We have been serving our local communities for more than one hundred years and we are proud to offer our customers the best of the best when it comes to lending products.

If you're interested in purchasing a piece of land and you're looking for the best options on the table, contact us today so we can determine how to best meet your needs.

 

 


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