Most of us are familiar with the traditional residential home loan but construction loans and loans for land are quite different. These loans are different in how they are structured and processed. It also depends on how ready the land is for building. Is it a buildable home site or vacant, raw land? Will you be getting a construction loan or just a loan for the land itself?
Land loans are riskier for lenders in that there is no home or improvement on the land to use as collateral. It’s usually easier for the owner to walk away and leave the lender stuck with the land; not a great bargaining tool. Because of this, down payments and interest rates are higher for land loans than residential home mortgages.
The type of loan you’ll receive also depends on the property itself. If you plan on building, you’ll want to verify that the property is legally available to be built upon as desired. A survey will be able to identify boundary lines, easements, access and what the property is zoned for. Access will determine loan availability as well. If you have a difficult time getting to the property, lenders will have an even harder time and this can affect their decision on granting the loan.
If you have done all your prerequisites and determined that the land can be developed as you intended, only then should you seek financing. Land typically doesn’t go fast in Texas so most buyers have some time to conduct the necessary research in order to determine usability.
If the land is raw, meaning little access, no site to build and no utilities, the down payment is even higher because lenders are taking on an even bigger risk. Lenders may even require a 30% down payment. It can be as low as 10% for platted lots if you have plans to build. This is where planning really comes into play. Not only do credit reports, history and down payments affect the chances of getting a loan, as in a residential loan, but plans do as well. What are you going to do with the land? If lenders can see plans to highly improve the land with a house and building, their investment goes up. They see the potential that the property could return in cases of default.
There may be assistance for land loans but it’s best to talk with your lender about options in your particular rural area.
Other options include Seller Financing. The seller may be able to offer a short term loan for the land with contingencies on refinancing professionally once the property is built. Seller terms are always more in depth however, so talk to the banks first and use seller financing as a last resort. Although you’re likely to have higher interest rates, this may be a better option but be prepared for a higher down payment as well.
Institutional Financing is an option for those that have really done their financial homework. You’ll want to prepare a concept package stating your intended purpose for the property and how you plan to pay back the loan once developed. Interest rates may be higher and there may be more collateral to guarantee the loan but this may be a good option.
For more information on land loans or connecting with a land loan specialist in Texas Hill Country, give me a call anytime!