Building a new house is exciting, and half the fun is selecting the perfect plot of land. Getting a land loan and determining your eligibility differs from a typical loan or mortgage, so it's important to know what to expect.
DETERMINE A USE FOR THE LAND
Lenders tend to view land loans cautiously and as a higher risk than traditional mortgages, because it's typically easier for a borrower to walk away from an undeveloped piece of land than a residence.
To offset this risk, lenders often require a larger down payment and charge a higher interest rate. As a borrower, having a definitive use for the land and plans to increase its value can help in determining your eligibility.
However you plan to use the land, have it professionally surveyed and review the zoning regulations to make sure you're legally allowed to use it as you wish.
FINANCING CONSIDERATIONS WHEN YOU BUY LAND
How you plan to use the land is a major factor in deciding the type of loan you'll need. Location is key, and If you can show your lender it's a prime piece of property versus a plot out in no-man's land, you'll have an easier time. Why? The lender will have an easier time re-selling an ideal location should you default on the loan.
Another factor is the land itself - is it already cleared and does it have access to utilities, sewers and roads? Or is the land "raw," meaning these man-made improvements have yet to arrive? Raw land is cheaper, but it's much harder to get financing, and you might find yourself with higher interest rates and a stricter repayment plan.
The path of least resistance is one where you plan to build immediately. You'll get the most favorable loan terms with approved construction plans in place.
WHERE TO GET LAND LOANS
When you begin your research on how to buy land and get a land loan, it's best to start with your local banks or credit unions. A local lending institution will be more familiar with the area and have a better idea about the land's value than a national bank with no local presence. Local lenders also have a vested interest in community growth, which makes them more likely to finance a loan.
As with other loans, the bank or credit union will check your credit history before approving a land loan, which can have an impact on loan terms such as the interest rate and down payment. Expect to pay fees associated with the loan that cover a title search and insurance, land survey, appraisal and any attorney fees.
If you already own property and have little debt, obtaining a home equity loan for your land purchase is an option that usually presents lower interest rates and more favorable terms. Federal aid is available if you're seeking a loan for land in a rural area. The U.S. Department of Agriculture offers direct loans with low interest rates and favorable term requirements for those willing to improve the property.
Staci Giordullo is a reporter for Angie's List, a trusted provider of local consumer reviews and an online marketplace of services from top-rated providers. Visit AngiesList.com.
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