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.